One of the truest axioms of trading is that the thing you worry about least is the thing that will bite you in the rear. As others have noted, expectations are extremely positive now and few are worried about the downside. But whose expectations?

Something we have written about previously is the length of historical data being watched closely by professional traders, particularly when juxtaposed with that being watched by those who sit in the bleachers. The best bull moves occur when the pros are looking long term and the amateurs are nervous nellies. Right now we have the opposite. With tonight's close we see the amateurs being complacent; they are looking back at what has happened since Election Day. The pros meanwhile are monitoring prices in a 4-day window, a most tenuous stance.

Stefan Jovanovich writes: 

One of my dubious theories is that the internal correlations that we all see in "the market" are largely a product of the development of the New York Banks becoming the clearing house for the nation and their converting that dominance into the "need" for official central banking. The data from the 19th century, which is limited enough to be within my meager mathematical capacity, suggests strongly that the business cycle was much more a matter of the fluctuations of particular businesses than one of the movement of the "economy" as a whole. Weyerhauser's fortunes and Swift's were not on the same cycle. The movements of "Timber" and "Pork" were largely independent.

I wonder if that is becoming the case once again. Optimism may be the general news, but the prices of retail companies, particularly those in the clothing business, very much fit the opposite of Bill's description of the general mood. The general assumption is that everyone will lose their business to Amazon.

Russ Sears writes: 

"One of the truest axioms of trading is that the thing you worry about least is the thing that will bite you in the rear."

I call this the fundamental law of risk management: What risk you ignore or discount incorrectly are the risk you over-load your portfolio with, thinking you have found the "key to Rebecca"/free lunch or at least you have optimized your risk metric such as sharpe ratio. This is what happened to the modeler of RMBS, unknowingly overloading on model risk.

Alston Mabry writes: 

I have often thought (but been unable to effectively implement) that if you could determine what factors the market is not paying attention to, you could place some profitable bets or at least put on some good hedges.

Which leads to a non-quantifiable definition of a bubble as a big move up that continues even after a critical mass of players have become aware of the fatal risks - everybody knows they're playing musical chairs, but it's too profitable to stop.



 As time is counted, the earth has once again made another lap around the sun. The stock market has for another year continued on in its optimist triumphant. I would like to praise those that value time, honor it, and consistently strive with discipline and faith in self and others to pursue exponential growth.

It is my belief that an intuitive understanding of the exponential function, its power, persistence (perhaps even an eternal legacy) is the basis of a person's success and happiness however one defines it. If its power is denied, it ensures one's failure.

It is said that the polite do not talk of illicit sex, dogmatic fanaticism (often found in the most political or the pious religious) and gambling. I would suggest that these forbidden desires are rooted in our natural instinct for exponential growth, either to fool ourselves into believing we are pursuing exponential growth or by short cutting time.

However, if you talk about saving and investing in business acumen, marriage and family and building a solid reputation, even the most conformist among us will approve. These are much slower but more respected historically proven methods to build one's fortune, establish one's family dynasty or build a legacy, and if one endures the short term trials and pain, successful ways to pursue exponential growth.

It would appear that people have a natural respect for the slow persistence of having an edge but taking a short term risk. Nature has in it a reward system that respects those that honor time but can endure short term risk. But the exponential growth model tests our faith in time, humankind and even those closest to us. It is in these times of vulnerability however, that if one accepts this vulnerability and commits more, one is most likely to receive the most from this faith.

Yet this model of growth can be easy to fake. Love, financial advisors, and moralists are the trifecta for con-men. Further it can be difficult to distinguish a linear growth model from an exponential growth model. Scatter plots of an exponential growth often are highly correlated to linear growth model making it hard to distinguish. Further, after growth, time alone often make it clear if the growth is because of a trustworthy foundation, or if the growth was artificial creating by borrowing from the future, creating an exponential decay of debt. Further, as Yogi said, "It's difficult to make predictions especially about the future."

With exponential growth, comes reoccurring compounding. But the hallmark of the "chaos model" also has a similar compounding. A small seemingly insignificant compromise can cause a collapse of such a growth model if resources become strained and great power or wealth are too concentrated, like the flap of the wings of a butterfly can change the course of a hurricane. The best of plans can be derailed by a slight change in the environment sending the growth plan into dogmatism, centralized power and concentration of wealth by systematization rather than market forces.

But exponential growth gets its power not just from patience and time, but from each other. Most powerful is small groups of people banded together by mutual trust to work together for the long term good of each other. When an engineer and a machinist get together with a scientist and a business man the combination can be much bigger than four added together. Their entwined strengths can combine and their weaknesses can be covered.

Families are perhaps the most rewarding and enduring growth model, but they also can be the most difficult to try to predict. This of course can be difficult to see day to day when the follicles of those closest to you are so apparent , or when a T-Rex of centralized power is hunting for you.

An insistence that second order and higher effects are fully understood and controlled beyond reason, if everything is always roses, consistency of only positive returns and the advertisement thereof are all signs that a marriage, business and reputation are about to implode. It takes faith in one's self, in those that love you and that you trust in, to those you agreed to do business with and the markets in general to ask for accountability, as vulnerabilities are exposed, to ask, to test and prove to yourself that all are still pursuing exponential growth…rather than faking it. But one must be willing to ask, to test and confront those challenges sure to arise from building a long term plan. One must be willing to admit that the higher order effects of pursuing exponential growth creates uncertainties that will be met. Rather than pretend that you have already tamed exponential growth and it must be submissive to you.

May your faith in the power of humankind to solve problems, be fruitful, and those closest to you to share one another's vulnerability intertwined together bringing all super but all to human strength, another year.



What are the factors that make so many useful idiots and alluring shibboleths so prevalent and harmful in our field. The desire for publicity and renown must be one of them. So many personages who don't or can't trade achieve prominence and self esteem by becoming pundits or propagandits on the media. Many of them are second handers who can't make a profit on their own, but can only prospect by forming a fan club that carries their positions along once they front run the positions on both the long and the short side. Others achieve prominence by coming up with a very unpopular call that will turn out to be right once in 10 occasions and gives them long lasting fame. Others have recently been fired from their jobs, and join the media as a way of achieving psychic or economic remuneration.

The question arises as to whether a useful idiot has always been a useful idiot or becomes one after he rises to prominence. The same with shibboleths. Have they always been wrongful and harmful or do they become such only after they are bruited to the public. In considering this subject it might be helpful to start with an enumeration of current useful idiots and shibboleths. Certainly those who are consistently bearish on stocks and risk assets like the man of multiple court cases and yoga, or the recently passed Barrons' columnist, or the world stater who always calls for more agrarianism and is always bearish on enterprise must be near the top of the list. But what are the general factors that determine our following a useful idiot or harmful shibboleth? How can this phenomenon be usefully unraveled?

Kim Zussman writes: 

Why would successful traders/ money managers dissipate their advantage by publicizing their methods or thinking? Most or all would want to keep their insights secret. If trying to market to investors, returns sell better than talk.

Depleting the persistently successful from the pool of talkers means more talk from the less skilled, and few meaningful revelations.

anonymous responds: 

There are some strategies that benefit immensely from increasing participation.

Russ Sears writes: 

Of course idiots are useful to those that know they are idiots and take the other side. It's the old dot com hucksters and short sellers secret that promoting a position you already have, once you're holding full position, you want someone to unload it, you need someone left holding the bag. How else could the markets cause maximum losses for the most people.

Might I add that it is easy to find fault and sound profound, but it is difficult to pin-point why someone or some company will succeed and even more difficult to find an audience for ones wisdom. Further, most can't comprehend that volatility is not linear but clearly see the risk tomorrow. Few comprehend the risk premium outweighs the volatility over time, and few are willing to wait, but many want to do something. The law of showbiz meets the internet age: If there is an audience, someone will play for it.

Ed Stewart writes: 

The useful idiots or shibboleths that rise to celebrity circulate and gain steam because they serve an unmentioned interest–they have an unseen fan club. Some times it is increasing the brokerage commission, sometimes it is simply giving the public the "red meat" it needs to get clicks/eyeballs for add revenue, sometimes it is literally as servant to "the idea". At times it seems all three at once. Hat trick. The only known defense is the cane.. to hobble down and buy at puke points, but also to raise over head and smash the media channel that pipes the idiots to restore a more sound state of mind.  I did it 7 years ago. So far, so good.  



I don't have many views on markets, but one - and the most successful - concerns interest rates. It is that the Fed and government tend to have a bias which makes the bond markets trend either towards a long term bear market or a long term bull market at different times. However, politics is not the foundational cause of this.  Rather, it is society and "social" injustices caused by government involvement that drives the politics to reverse itself from time to time. Rocky deserves praise for his phenomenal calls starting in early 2016 about Trump's election and its impact on the market. I would agree with Rocky that Trump's election is a signal that the tides have turned on the bond markets. However, Trump's election is due to men's reaction at the ballot box after not being allowed to complain, or at least not politically correctly being allowed to complain.
Despite the fact that women now make up 60% of our college graduates, education, which government spends so much money on, has categorically failed men. You go to any public high school, look at the list of valedictorians and salutatorians in the last 10-15 years and almost all schools will show a statistically significant bias for the girls. Do this for the poorest communities and you will not even need to do the statistical calculations, it will be so glaringly obvious. Single moms have doubled since the last long term bear bond market. Children being raised by both biological parents are now the minority.  This has caused boys to have fewer nurturing father figures and less time with them.  This has destroyed a generation of youth. While a rising tide raises all ships economically, a lowering moral tide makes all ships less sea worthy. The young girls are suffering as well from dumbing down of their potential mates.  

What does this have to do with interest rates: well yes, Trump politics will drive rates higher most likely. But it is only a matter of time before the other side realizes why he got elected and joins the march. They will offer their inflationary version of how government can "solve" this crisis young men are facing, just as both sides offered their version of how to solve the crisis caused by the draft and Vietnam. Then the political cycle will again change and will keep driving interest rates up further..



 "Why can’t we see that we’re living in a golden age?: If you look at all the data, it’s clear there’s never been a better time to be alive" by Johan Norberg

Jeff Watson writes: 

There's huge money in doom and gloom.

Ralph Vince muses: 

A person should live each day of his life with the same mindset, the very same attitude of savor and gratitude for every minor thing, as if he got out of jail that morning.

Or, as the Old Frenchman himself would say, "If you have the same address as a thousand other guys, you don't have a lot going on."

Alston Mabry writes: 

Pessimism is a strategy. People who have learned, usually from childhood, that they cannot act on their most important impulses use pessimism as a way to devalue what they deeply believe they are not allowed to want.

Bill Rafter adds: 

Just a minute…

As we all know from trading, if you want to increase your profitability over time the most effective strategy is to limit losses. Possibly related to this is the result of several studies attesting that fear is a greater motivator than greed, buy a factor of 3 to 1. Furthermore, we all look at prices and know both instinctively and historically that those prices will not be constant over time. They may be higher or lower, but not the same. Thus, pessimism is historically justified, profit-saving and possibly life-saving.

But to want to trade these markets for profit, one also has to be optimistic, often excessively so in light of bad experiences. You need both.

Jim Sogi writes: 

Jeff is right. Television causes pessimism. Don't watch TV. I haven't had TV for 47 years. It's not only the content. It does something to the brain. It's harmful. 

Stefanie Harvey writes:

Exactly. Television, especially US news television, is the poster child for confirmation bias. 

anonymous writes: 

Many good reasons for worry exist. If you're not worried, you're not paying attention. All of the worries stem from something completely nobody talks about in polite company: population explosion. In 1804, the world's population was 1 billion. In 2012, it topped 7 billion. It's projected to reach 9 billion in 2042 — within my son's lifetime.

True, Paul Erlich got it wrong when he said we'd all starve by the end of the 1970s– but go back read his book. Then reflect on how much different life is.

All those people are unsettling policymakers, with these results (and they are what's secretly worrying us):

Unspoken Fear #1: War. Today's empire builders are intent on grabbing resources; nuclear weapons are in too many hands.

– China: rich and populous; thanks to the free-trade break we gave them in the 1970s, they've created a war machine and ready to go for our jugular.

– Islam: implacable and populous; we have spent trillions trying to establish a decent government, and the area keeps morphing into an empire that despises us and all we stand for; they want their old empire back, be it from Baghdad or Istanbul.

– North Korea: Our strategy is, "Let's all ignore that man in the corner, and maybe he'll quiet down."

– Russia: ruthless, and intent on restoring the empire of Rus.

Unspoken Fear #2: Dystopia.

– When people don't have honest work, nothing good can come of it. In America alone, 94 million people are out of the work force. We're not being honest about the impact of robots and artificial intelligence. It's this fear that gave Trump the nomination, not that he knows what to do with it.

Unspoken Fear #3: Central government that keeps growing.

– Confronted by the population explosion, the elites have decided that the masses must be controlled and pacified. This political philosophy shows up in the fear of liability for anything fun, in subsidies, in central banking. We see sledgehammer policy-making, from FDR to Obamacare.

– And the educated love it! Calls for authoritarianism are the norm among socialist youth, aging hipsters, authors and "educators" at all levels.

These memes and unspoken but rational fears show up in pop music, with its ugly pounding overamplified brutalist mindlessness; in contemporary academic music, with its screams and jaggedness; in art, with its sneering cynicism; in architecture, with its boxy Stalinist aesthetics.

It shows up in the piggishness of the powerful, with Hillary Clinton the prime example. The rich expect multiple homes in idyllic spots, bodyguards, private jets; the poor suffer in overbuilt, crowded, noisy, polluted cities.

I happen to be an optimist, and always see the glass as half-full. Please note I am not prescribing anything; for one thing, it's gone too far. Nor do I think that going to Mars will help.

Russ Sears writes: 

First, human super-cooperation is built on trust. To evolve as a group, a high percentage of that group must be trustworthy for the compounding effect of the prisoners dilemma to work. As the group grows too big, it becomes too easy for a individual to feign cooperation. Hence the need for creative destruction and for power being placed in the smallest sized group necessary. It has always been easy to look at the big groups and see the corruption and assume that they are in control of the long term future. But the truth is they are dinosaurs and will lose out to the small but wise group/ businesses that still operates at the human individual trust one another level and are quite hidden from the spotlight, because of size. But these time and time again raise the tide for all.

Second, personally, it is too easy to dwell on the jerks that simply can ruin it for everyone but that fall into everyone's life. They can ruin many nights even if as a rule I try to avoid them. A single jerk can derail my perspective and keep me up at nights and easily crush my spirits if I let them. I found the best antidote for me is to turn the tables if I start thinking of the jerks and think instead of those in everyone's life that have blessed them with love, grace and patience. I think of my Dad's second wife, caring for a dementia patient at home for 13 years and weeping tears of love on his passing, the coach that helped me, the friend that's always there, etc. I try not to let the jerks own my mind rather than those loving, lovely (my spouse), good and virtuous people in my life. This also goes with those news makers, politicians and on the dole.



 The book The Lady Tasting Tea: How Statistics Revolutionized Science in the Twentieth Century is a one person historical account of the greatest statisticians.

While one may quibble with the authors choice of who the greatest statisticians where or how much he wrote on the statisticians he personally knew, its strength is also because this book is written by a student of R. A. Fischer. a statistician known for introducing statistical research methods into science and furthering Galton's regression analysis.

The "lady tasting tea" is a test if a lady can taste if tea is mixed into milk or if milk is mixed into tea. Highly recommended for those that love history and/ or statistics.

David Lillienfeld writes: 

Let's stop this myth. Fisher's contribution to research methods was in "translating" Pearson. Pearson had actually derived the mathematical formulation well before Fisher, and that Fisher "stole" (from Pearson's view) what became the F test and the like was the basis for a long-standing animosity between the two. Bringing in statistical methods into science was the work of others, not Fisher.

Pearson started that task in the early 1900s for biology and medicine, work continued by Major Greenwood (Pearson's protege, though some might argue that Egon Pearson, Karl Pearson's son, of Neyman-Pearson Lemma fame among other things, took on that role ) and then A Bradford Hill (Greenwood's protege). Hill was among the first tobacco-lung cancer studies (frequently not noted is that Richard Doll was Hill's protege).

Hill was also the genius behind the first modern randomized trial, the MRC Streptomycin Trial in 1948 (conducted as a randomized trial to eliminate bias and not to allow for significance testing). (The trial was necessitated by the cost of streptomycin as a treatment for TB and the essential bankruptcy of Britain post WW2. If the drug didn't "work", the British government didn't want the expense of buying it.) In the US, it was Harold Dorn's work bringing stats into medical research. Dorn and Hill studied together in 1933-5 under Pearson (Egon, not Karl) in London. That was just before Hill published his book on statistics in medical research, which itself translated Pearson for medical researchers.

On the social science side, there was F. Stuart Chapin methodologically, and a bunch of students of Franklin Gittings on the pure stats side. (Gitting's statistical empiricism contrasted with the case-study methods championed at the University of Chicago—which wouldn't change until Sam Stouffer went to it from the University of Wisconsin, where he was the thesis advisor to Harold Dorn.

These were all statisticians, with the exception of Chapin, who strode the fence between stats and subject matter.

Fisher's fame derived out of a book that allowed people to understand Pearson's accomplishments, significant but hardly the person to bring stats into scientific research.

Frank Yates, Fisher's contemporary and teacher to Bill Cochran (of Cochran's theorem—the basis of all contingency table analyses since about 1940 (and yes, Fisher's exact test is still sometimes used, but not anywhere near as much as the tests deriving off of Cochran's work, including log-likelihood, Mantel-Haenszel (also known as Cochran-Mantel-Haenszel today), as well as sampling and queuing theory). That work (Cochran's) had as much to do with bringing "modern" stats into science as Fisher did—but he didn't write much. Yates is also significant in the development of the analysis of variance, but the foundational work there was Fisher's. The AoV was important for agriculture and some laboratory work, though some might argue that Student (Gossett)—another student of Pearon's was the more significant figure there—it is, after all, Student's t-test, not Fisher's t-test. It was the F-test which was named for Fisher.

Fisher was the Richard Feynman of stats, though some might argue, reasonably, that Cochran's book (aka Snedecor and Cochran) taught at least two or three magnitudes more people in science about stats than Fisher ever did, holds as much claim to that title as Fisher did. Cochran went to the US because he and Fisher had quite a falling out after Cochran published what has become known as Cochran's Theorem (which demonstrated, among other things, that the sum of a series of chi-squares was a chi-square and that one could thereby combine contingency tables for analytic purposes).

That was 1938, and the Cochran-Mantel-Haenszel work started in 1954—M-H was 1959). Cochran told me that he and Fisher were good friends before that, sharing a "smoke and afternoon tea" together. (Cochran was well along in suffering from strokes by the time I got to know him, so he might have that history a bit wrong, though Tony Hill agreed with Cochran's recollections—Cochran was well known in London by 1936/7.) Cochran's great "sin" was his refusal to "genuflect" (his word) before the "alter of Fisher" when he published this theorem and stating that the idea was Fisher's—Cochran said it was not. Interesting is that aside from Fisher's exact test, he never did much with contingency tables.

Fisher was a genius, but his impact in stats has been way overblown in its significance (pun intended), much as Feynman was a phenomenal teacher—rainbows on the blackboard—but his impact on physics was normative, not transformative. Pearson has a stronger claim to being the person who brought statistics, notably mathematical statistics, into scientific research, though as the above discussion suggests, he was seminal but hardly alone.

anonymous writes: 

Fisher's Fundamental Theorem of Natural Selection, from his 1930 work, "The Genetical Theory of Natural Selection," which speaks to the relationship of "the relationship of "increase in fitness," (the aggregate of the means, we can think of this as) and "variance," states:

"The rate of increase in fitness of any organism at any time is equal to its genetic variance in fitness at that time."

But Fisher was, in looking at the natural world, only therefore considering a narrow band of the spectrum — things, for whatever reasons, are "bound" in the natural world (for example, if I double my height, I end up squaring my weight in order to maintain proportionality, and my legs buckle under the weight [they are probably close to do so now]). Further I contend, this same mechanism, which we only see a sliver of the spectrum manifesting in the natural world (and the overarching question then becomes "why?") manifests in spread of a population of bacteria, spread of disease within cells of an organism, or spread of infected individuals within a population, to the growth rate of national deficits (the idea, to my great satisfaction, having FINALLY found an ear and an excitement with the powers who can do something about this on an international level), and, as we've seen in trading (and which demonstrates that variance in returns is equivalent to negative returns, not to "risk.") The following graphic, which I hope comes through, illuminates the idea:

The black curved line is the average, compounded growth rate (the average [geometric] rate of population growth, what Fisher calls "the increase in fitness of a population"), the hypotenuse, the mean growth in population size per period, the base of the triangles, the variance in growth in those periods. Clearly, Fisher saw in the natural world, a sliver, to the left of the peak of this mathematical relationship.

In very many things, we see this relationship over and over, but often because of natural bounds, we see but a sliver (trading, being an abstraction [until the margin department calls] however, experiences the full spectrum).



 Since I have done stress testing on 2 insurance companies, I could give you many details on the absurdities in the calculations and results, but rather I will give you the philosophical reasons. Neither side really wants to know the truth.

It's like going to a lawyer after the marriage has headed south, not to get a divorce, but so the financial aspects of the marriage are closer to bring the couple closer together rather than a marriage counselor so both sides can admit mistakes and learn to change the dysfunctions in the relationship.

First the government(s), wants to be the savior, not the bad guys in the stress scenarios. Yet if the big banks are to fail the government(s) policies were most likely the cause of the crash. To come the "rescue" of the banks they have to be able to do it without admitting error. They assume that "normal" channels are what will be available.

Further, admitting bias and ignorance of government is not part of the scenarios, yet in the last 60 years we saw a 30 year march to double digit inflation then a 30 year march to negative interest rates. In between a Savings and Loan scandal and a government push to free money for subprime fiasco. Pretending that government is by default "not guilty" and therefore the banks collapse won't result in a literal regime change so they won't be another bail-out is the unicorn assumption.

Second not just the To Big to Fails but all the financials want to assume that their advantage comes from their size an smart maneuvering, not from their government connections. That the markets and their customers/clients may react but won't revolt against them.

The test assume that the leadership acts in the best interest of the clients rather than doubling down and pushing for more and closer government favoritism in times of stress. They may test stress lapse rates but they don't ask if those rates can continue to accelerate or even if those lapse rates changes are in line with "normal" competitive pressure. Since the truth would hurt too much each side pretends they don't know the other is lying.



 Most families make the journey to DisneyWorld or Disneyland soon after they judge that "the kids are old enough now." "You haven't been to DisneyWorld?!" has the force of a shaming epithet in elementary school peer groups. Parents who have not "made the trip" are often considered poor providers.

I have concluded that Disney is a deep threat to American society. Visiting these parks is a training system for the America-to-come (and other countries where the movement has gained traction)…an America I don't think I will like.

Disney visits teach two things:

1. be an observer, not a participant …. a Disney trip is way down on the interactive scale, most "rides" are passive excursions through a terrain or story or experience over which the guest has virtually no control or input. And

2. how to wait in line politely and passively for long periods of time with tethered, exhausted, sugared children tugging on the parent…perhaps an apt experience for preparing us to endure the DMV or the post office

Disney's contribution is to make this otherwise awful experience into something that cannot be passed up. The best people mover of all time consults other companies and organizations on crowd management and control.

Is there a place for Disney in fighting terrorism?

Rocky Humbert writes: 

 I thought the original post about Disney was tongue-in-cheek — as it left me ROFL — but I'm starting to wonder whether it was a serious anarcho-anti-establishment rant?

Without opining on the misery of standing in queues under the Florida sun, Disney sells a professional, well engineered, family-friendly entertainment product. It is difficult to fault their franchise, execution and profitability. I have found critics of Disney are the same folks who hate the American Flag, Mcdonalds, baseball and apple pie. That Disney has a slightly left of center political bias is a reflection of its market research rather than agenda — I am certain that they would shift their bias quickly if it suited their profitability.

I have not been to a Disney park in many years, but it is a right of passage for most every parent with young children. My memory of it was pleasant. My primary complaints about the experience were the cost and the food quality.

If you are going there to glean a deep understanding of history, science, environmental studies, etc., it will be disappointing But if you are going there to have your youngsters smile and not be exposed to vulgarity, profanity and things that many of us consider the dark side of the work, then it is a great place.

Again, every detail of their product is micro managed and they should be saluted, not pilloried, for providing consumers an interactive product that they want and pay for. Good luck to the parents of young children who think they should go "rock climbing." See you at the ER.

Russ Sears writes: 

While I concur with Rocky's sentiments that Disney leaning left is most likely due to the leaderships belief that the left will win the future. What bothers me is not the left or right side of their politics but their marketing preference towards girls and capturing a large segment of the young girls and their mothers. I have only daughters and they loved Disney. But when 60% of the college graduating class is female, and 40% is male, a figure that was reverse in the male chauvinistic 70's, it hurts to think that the young boys' futures are so bleak that Disney doesn't market too strongly to boys or their fathers and knows where the future is. While it maybe the future, is such an accelerating trend sustainable for the next 30 years or is there a limit to how bad this can get?

Jim Lackey writes: 

 Disney world is fantastic. It is expensive, yet worth it. There are some good points that strong women and some men point out. Life is not a fairy tale and you're not a princess. However, once that statement is out of the way the experience is best if you look at it as purely entertainment and have fun.

Nothing for the boys? My best memories are when my dad said: NO RACING this vacation son! We are going to Florida. I am taking your sister to Disney. Your brother wants to do the water park. Son, I want to fish in the Keys. It is your job to navigate. Here is the map, the compass and my cc card. Plan the trip. P.S your sister will refuse to stay in a hotel without a diving board. Your mother needs, we need, for your mother to have a car and a place to shop. Love Dad.

Yes, that was a note he was off to work 7/12's to raise the funding for the trip.

I lived in Fla from July 91 until June 2006. In that 15 years I went to Disney countless times. We also hit Busch gardens, when Budweiser still owned it. I had fond memories of that park from a kid. It wasn't in the parking lot of the ball park of Disney. Once a year I was kicking and screaming about a summer Disney trip, again for my wife and small children. My wife set me up. She had paid for a full day of me driving the Richard Petty driving experience (12-1 compression aaah about 550 HP stock car.) I had to follow the instructor for 15 laps (2 cars.) Then he realized I could drive the car. They had a speed limit of about 150 on the strait so we had to coast, then right before you slam on the brakes to corner he had us go full throttle for one thousand one one thou, SLAM the brakes…. right before the apex of the turn, which is quite unnatural, you went back to full throttle. I noticed the slight delay from the full throttle to the power band of the engine. Actually I noticed a puff of fuel come out of the lead race car's header or exhaust pipe before the car slammed the apex, where a driver would normally go full throttle. Then we had it wired.

I upset him by pushing him down the strait when he was waiving his arm frantically (which meant slow down back off 3', we were 150 mph about 100 feet into the strait. I dunno if I did 50 or 60 laps. All I can tell you is I wanted out of that hot box on the 95 degree Fla day so bad the final 10 laps were work. I though damn these stock car drivers must train very hard on long distance bicycle or run many miles a week to drive 500 miles in this hot box. They must have full focus in real racing for that 3 hours and that takes endurance. I walked into Disney and the wife said, "so? Are we trading the Drag car for a stock car?" No way baby, I'll never be a stock car driver.

Disney rocks. If you can't find something to do there…send me a note. Few realize all there is to offer.

Disney is my retirement plan. That will be my job from 62-82. I'll be rebuilding engines, motors, hydraulic pumps and training young men, how to work. Did you ever notice how they take out the trash restock the concessions, or how the leaf blower/ vacuum exhaust smells but doesn't stink like your gasoline lawn mower?

I remember as a 11 yo kid asking dad, are they running vp racing gas in that leaf sucker? Pops can you smell that exhaust? That's the same sweet smell of fuel burning at the dragstrip. Only you'd notice, son. Did you wonder where does all the trash go? We could never figure out how is it that every kid that works there for the minimum is so happy. My wife, the UCF grad explained it to me. Talk to the management. Where are they? Exactly!

Stefan Jovanovich writes: 

 A trip to Orlando's theme parks would not be complete without a trip to Florida's own surf city, Cocoa Beach. We make a day trip over to CB at least 7-8 times a year, usually in spring and summer, and sometimes stay a few nights at the surfer friendly Wakulla Suites.

A typical day trip begins at 3AM with a stop at our local 7/11 for coffee and donuts. Boards strapped and secure on the top of the car, we race up I-75 until we hit I-4, take a right to Orlando where we exit and take the 528 over to Cocoa Beach. Our excitement is palpable when we get close on the 528 causeway, and one can smell the Atlantic Ocean. Pulling into Cocoa Beach on A1A, if all goes well, usually happens around 6:15-6:30 AM. Our ritual is to always stop at the Waffle House for a greasy breakfast, some good country tunes on the juke box, while rubbing elbows with working people and an eclectic mix of tourists and surfers. I love the waitresses at Waffle House, the way every customer is referred to as "Hon."

After breakfast, we find our parking spot, unload the car, set up the tent, and paddle out for a nice dawn patrol. Since we always take a couple of local kids along with us, they get the job of setting up our site. The kids are always good sports, and "Get the Joke" as Lack would say. Generally, we will surf for a couple of hours, taking time to stay hydrated (one loses a lot of water in the sun and surf), then relaxing with a quick siesta under the shade from the little tent. Waking up, we'll put on sunscreen (Bullfrog) and go back out for a couple hours.

My wife will make a run over to Publix for some excellent deli subs, some salad and fruit which we will eat for lunch right on the beach. Usually after lunch is another short siesta, then back to the waves. Since my wife learned to ride a longboard, she will paddle out for a few after lunch. Otherwise, she is content to stay under the tent, watching us surf while reading.

If the surf is really good, we'll stay out until 4-4:30 or until exhaustion takes it's toll. I have found that using a waterproof ipod is just the ticket for adding the enjoyment of good music to a surf session. My son does the same, and while my surf music tastes tend to gravitate towards Coltrane and Monk, his is more geared towards punk and hip hop. The difference in musical tastes is very common between old guys like me on longboards, and young guys who ride those potato chip shortboards. Either way, the good tunes extend the length of a surf session and make it much more fulfilling and spiritual.

After surfing all day, late afternoon creeps up quickly and we feel a tired sense of satisfaction and accomplishment. Wrapping up the day, the groms know their duty is to pack up the boards, tent, coolers, etc. We always make it a rule to park near Ron Jon's. We wander into their huge 2 level surf shop, gawking at the lobster burned tourists, the cheap "Made in China" trinkets and other souvenirs of questionable repute. We always head upstairs to look at the huge selection of surfboards, talking story with the board sales staff, who are usually grisly old guys who have as much surfing experience as Gerry Lopez. I always buy the groms something useful, as they generally come from very limited circumstances and things like no-name wetsuits, leashes, rashguards quite inexpensive at Ron Jon's. Sometimes Ron Jon will have good deals on Hawaiian shirts, the kind that I live in 360 days a year. My wife will always ask, "Are you sure you need another 5 shirts?" She's always a good sport, lets me have the shirts, and I make sure to find something good for her as well.

After an hour or so taking in the spectacle that is Ron Jon, we walk across the street to "The Shark Pit Bar and Grill," at Ron Jon's main competitor, the Cocoa Beach Surf Company. Their meals are quite delicious, with generous portions, an attentive waitstaff, and are quite filling. After dinner, we'll check out the boards and equipment at the CBSC shop, then drag our way back to the car.

Leaving Cocoa Beach around dark, we always stop at a Starbucks, where I like to get a quadruple venti cappuccino, drugging myself in order to make the 3.5 hour drive home. We usually make it home before midnight, barring some horrible traffic on I-4. The drive home finds everyone in the car passed out, leaving me to enjoy my thoughts, sense of accomplishment, and the love that I have for everyone around me.

Dropping the groms off, we make our way home, to the comfort of our beds. The car is never unloaded until the next day, usually in the late afternoon. I never unload the car myself, preferring to delegate the job as there are more pressing things on my mind, like sleeping in all day long. Still, one cannot have a day trip to Cocoa Beach without suffering one major unintended consequence, which usually manifests itself as an ear to ear smile that lasts for a couple of days. If you have never been on a surf run to Cocoa Beach, or it's sister New Smyrna Beach, your life is sadly incomplete.



 When Wiswell got into a complicated situation, he'd always say, "I'm in over my head, I better simplify". That seems like a good strategy. The risk has increased and the expectation has not increased, so the utility of the position has decreased. Yet when a comparable situation in the market occurs, i.e. when the outlook becomes more uncertain– for example, before an upcoming announcement or when a regularity changes from good to mixed, the tendency of myself and my traders is to either stay with the whole position or close it out entirely– never to reduce by half as Wiswell would do in his game.

The question arises–why does this bias occur? And is it a characteristic of all traders or is there something in my background and those that follow me that makes us fish or cut bait? One will ask Dr. Brett for guidance as well as soliciting guidance from fellow specs.

Russ Sears writes: 

It would seem that the Chair's question is related to the Cassandra Portfolio mentioned earlier. If the trade makes its forecasted return quicker than forecasted then "flattens" or starts to drop, it makes sense to sell the whole and look for a new edge. If however its return is "flat" at first, it makes sense to stick to the original forecast.

Where we don't have the magical 21 day forecast… If we have an edge that we believe in I try to go with my coaching mantra "have a good plan. Believe in the plan. Stick too the plan."

There is always someone touting the latest greatest new training method, diet, etc etc. Many good runner's jump to the latest fad to the next. But the great ones stick to their logically built training plans until they shows signs of overtraining.

Perhaps a related question is what are the signs a trader is "in over his head".



 We're all quantitative traders, but we still have gut feelings. The body has a self awareness of its internal conditions. The stomach has more bacteria than human cells. The stomach has more seratonin receptors than the brain. When nervous you can feel the butterflies. You get gut feelings about things that govern conscious decisions. I have a theory that dreams are the sleeping brain receiving feelings from the body and stomach during the night. Gut feelings are distinct from the amygdalian flight impulses. I've never heard of any studies or information about gut feelings other than anecdotes. How often has a gut feeling saved you, or how often does it lead to wrong decisions?

Russ Sears writes: 

Dr. Janice Dorn a former list member, wrote a book, in which she and her co-author argue that your gut feeling is not programmed for market risk, but market risk will give your gut the opposite reaction than you should take. When I tried trading the stronger my gut was scared the more I knew I should trade and vice-a-versa the more passive I was about my position the more I knew I should be out. Rather than honing in on this "skill", I would suggest a more palatable method, nerves were my undoing as a day trader. I suspect Dr. Brett S. would say something similar.



I thought this was an interesting opinion piece from David Deutsch who has some creative ideas in physics theory:

"Probability is as useful to physics as flat-Earth theory"

Gibbons Burke writes:

String theory, or more particularly, M-theory, which represents a current SWAG (Scientific Wild-Assed Guess) at the grand-unifying-theory-of-everything, requires some eleven dimensions to make it all work out.

Our mortal finite deterministic mental capacities can wrap our space-time evolved brains around four or five, with instruments perhaps a few more.

Perhaps randomness is how we get a handle on behavior which defies rational explanation in our four-dimensional flatland of what seems to be the 'natural' material world; if there are eleven or more dimensions, then perhaps what seems random for us has rules beyond our ken which govern the dynamics of the other invisible, shall we say, 'super-natural', dimensions.

Ralph Vince writes: 

I think people are missing the point of the article Dylan puts here. The author of this simple piece is discussing things that are right in my ambit, what I call "Fallacies in the Limit." The fundamental notion of expectation (the probability-weighted mean outcome), foundational to so much in game theory, is sheer fallacy (what one "expects" is the median of the sorted, cumulative outcomes at the horizon, which is therefore a function of the horizon).

To see this, consider a not-so-fair coin that pays 1:-1 but falls in your favor with a probability of .51 The classical expectation is .02 per play, and after N plays, .5N is what you would expect to make or lose for player and house, as the math of this fallacious approach - and I say fallacious as it does not comport to real-life. That is, if I play it on million times, sequentially, I expect to make 20,000 and if a million guys play it against a house, simultaneously, (2% in the house's favor) the house expect to make 20,000

And I refer to the former as horizontal ergodicity (I go play it N times), the latter as vertical ergodicity (N guys come play it one time each). But in real-life, these are NOT equivalent, given the necessarily finite nature of all games, all participants, all opportunities.

To see this, let is return to our coin toss game, but inject a third possible outcome — the coin lands on its side with a probability of one-in-one-million and an outcome which costs us one million. Now the classical thinking person would never play such a game, the mathematical expectation (in classical terms) being:

.51 x 1 + .489999 x -1 + .000001 x - 1,000,000 = -.979999 per play.

A very negative game indeed. Yet, for the player whose horizon is 1 play, he expects to make 1 unit on that one play (if I rank all three possible outcomes at one play, and take the median, it i a gain of one unit. Similarly, if I rank all 9 possible outcomes after 2 plays, the player, by my calculations should expect to make a net gain of .0592146863 after 2 plays of this three-possible-outcome coin toss versus the classical expectation net loss of -2.939997 (A wager I would have gladly challenged Messrs. Pascal and Huygens with). To see this, consider the 9 possible outcomes of two plays of this game:


0.51                     0.51    1.02

0.51             -0.489999    0.020001

0.51             -1000000    -999999.49

-0.489999            0.51    0.020001

-0.489999    -0.489999    -0.979998

-0.489999    -1000000    -1000000.489999

-1000000            0.51    -999999.49

-1000000    -0.489999    -1000000.489999

-1000000    -1000000    -2000000

The outcomes are additive. Consider the corresponding probabilities for each branch:


0.51          0.51                 0.260100000000

0.51          0.489999          0.249899490000

0.51          0.000001          0.000000510000

0.489999   0.51                  0.249899490000

0.489999    0.489999          0.240099020001

0.489999    0.000001          0.000000489999

0.000001    0.51                 0.000000510000

0.000001   0.489999           0.000000489999

0.000001    0.000001          0.000000000001

The product at each branch is multiplicative. Combining the 9 outcomes, and their probabilities and sorting them, we have:

outcome             probability         cumulative prob
1.02              0.260100000000    1.000000000000
0.999999       0.249899490000    0.739900000000
0.020001       0.249899490000    0.490000510000
-0.979998      0.240099020001    0.240101020000
-999999.49    0.000000510000    0.000001999999
-999999.49    0.000000510000    0.000001489999
-1000000.489999    0.000000489999    0.000000979999
-1000000.489999    0.000000489999    0.000000490000
-2000000    0.000000000001    0.000000000001

And so we see the median, te cumulative probability of .5 (where half of the event space is above, half below — what we "expect") as (linearly interpolated between the outcomes of .999999 and .020001) of .0592146863 after two plays in this three-possible-outcome coin toss. This is the amount wherein half of the sample space is better, half is worse. This is what the individual, experiencing horizontal ergodicity to a (necessarily) finite horizon (2 plays in this example) expects to experience, the expectation of "the house" not withstanding.

And this is an example of "Fallacies of the Limit," regarding expectations, but capital market calculations are rife with these fallacies. Whether considering Mean-Variance, Markowitz-style portfolio allocations or Value at Risk, VAR calculations, both of which are single-event calculations extrapolated out for many, or infinite plays or periods (erroneously) and similarly in expected growth-optimal strategies which do not take the finite requirement of real-life into account.

Consider, say, the earlier mentioned, two-outcome case coin toss that pays 1:-1 with p = .51. Typical expected growth allocations would call for an expected growth-optimal wager of 2p-1, or 2 x .51 - 1 = .02, or to risk 2% of our capital on such an opportunity so as to be expected growth optimal. But this is never the correct amount — it is only correct in the limit as the number of plays, N - > infinity. In fact, at a horizon of one play our expected growth-optimal allocation in this instance is to risk 100%.

Finally, consider our three-outcome coin toss where it can land on it;s side. The Kelly Criterion for determining that fraction of our capital to allocate in expected growth-optimal maximization (which, according to Kelly, to risk that amount which maximizes the probability-weighted outcome) would be to risk 0% (since the probability-weighted outcome is negative in this opportunity).

However, we correctly us the outcomes and probabilities that occur along the path to the outcome illustrated in our example of a horizon of two plays of this three-outcome opportunity.

Russ Sears writes:

Ok after a closer look, the point the author is making is scientist assume probabilities are true/truth based on statistics. But statistics are not pure math, like probability, because they are not infinite. Therefore they can not detect the infinitely small or infinitely large.

But the author assumes that quantum scientist must have this fallacy and do not understand. Hence he proposes that thought experiments or philosophical assumptions of deterministic underpinnings of physics must hold and should carefully supercede statistical modeling. Hence denying the conscious mind any role is creating a physical world outside itself.

So basically the author accuses others of not understanding the difference between the superiority of probability over statistics. So he tries to use pure thought to get pure physics devoid of the necessity of consciousness to exist. Perhaps he does not confuse the terms himself. It would be better written however, if he used the terminology a 1st year probability and statistics student learns. 

Jim Sogi adds: 

I believe that the number and size of trades at a price, or the lack of density at that price lead to certain gravitational effects. The other somewhat unknown are the standing orders at those levels but the orders and trade density are related.



The correlation between daily changes in SPY and USO were checked every non-overlapping 10 day period, from present back to 2006. The attached chart shows the result.

Current correlation between stocks and oil is high but consistent with the entire period, though recently somewhat higher than the past two years.

Russ Sears writes:

Here is a scatter of the Absolute value of 21 day correlation of USO/SPY at the start of each calendar month. To the next 21 trading days log normal returns. I used the Absolute value because it appeared high R^2 increase volatility even if the correlation positive or negative. But R^ 2 curves this relationship. Not predictive but clearly implies increased volatility with higher R^2









I would suggest that there is however much more to this suggested change in regimes on a daily or day trader holding period basis and those interested should study it further .



What kind of moving average of the last x days is the best predictor of current and future happiness, and how does this relate to markets?

Anatoly Veltman writes: 

The widespread misuse of MAs concept is what gives it bad name. 90% of testers and users look at crossovers, and the remaining 10% look at break of MA from above or below. All wrong

The only proven way to apply MAs from trend-follower stand point is to look at nothing else but SLOPE. (Trading Days) Is 14-day MA sloping upward? If so, then is 30-day sloping upward? If so, then is 50-day sloping upward? If so: then Shorting is forbidden! Mirror test may save you from disastrous bottom-picking.

Bill Rafter writes: 

I beg to differ. There is no way the "average of the last x days is best predictor…" It by definition is at least a coincident indicator and more likely a lagging indicator. BTW the same can be said of the SLOPE of the last x days.

However, you can construct a leading indicator by comparison (difference or ratio) of the coincident to lagging indicators. For this newly created leading indicator, there tends to be a lot of false signals, due to random market action. To guard against that you need to have very smooth coincident and lagging inputs. Making them smooth also makes them more lagged, but that will not hurt you as you are not going to look at them outside of a difference or ratio, which will be quite forward-looking.

The real problem is that investors want to identify a static x. In doing so they are insisting that the market be modeled by x periods. Well, the market doesn't always feel like cooperating. At times the market may be properly modeled by x periods, and at other times by x+N, in which N can assume a wide range of positive and negative values. The solution is to first identify the exact period over which the market should be modeled for the coincident valuation. And then go on from there. Rinse, repeat.

Russ Sears writes: 

This would be a good question to ask the trading expert psychologist Dr. Brett.

It seems that with the same brain imagery he uses is being used in the study of the science of happiness.

While I am no expert I have read Rick Hanson, PhD book "Hardwiring Happiness"/ It has been awhile since I enjoyed this book, my summary of it is "focus on the life/good in the present. Placing things in context to how it has brought you to this moment, then enjoy the moment is enjoying life."

Presence seems to be the buzz-word in studies of contentment and psychology of success. Being aware of all your inputs, your feelings and recognizing them as part of life, then celebrate living. Presence gives you the fulfillment in your life needed to be loyal and disciplined enough for what is working well in your life. Thanksgiving is a day built on this idea, But presence also gives you the courage to turn things around, admit things are not as you want, and gives you Hope for the future. Happiness is more about living your life, being in control, then it is circumstances. Some of my happiest times have been after running hard for over 2 hours exhausted after 26.2 miles, cold and totally and dangerously spent but knowing I gave it my all.

So I would suggest that MA, trend following, momentum, acceleration, nor death spirals nor reversion to the mean, value investing should not ever be the "key to Rebecca", rather judge them in the context of everything else. Some days "the trend your friend" other days "the sun will come out tomorrow". 

Brett Steenbarger writes: 

It's a really interesting area of recent research. It turns out that happiness is only one component of overall well-being. What brings us positive feelings is not necessarily what leads to the greatest life satisfaction, fulfillment, and meaning. I suspect the market strategies that maximize short-term positive emotion have negative expected return, as in the case of those who jump aboard trends to reduce the fear of missing a market move.

Ralph Vince writes: 

Too many times in life I've found myself in darkened parking lots with a small gang of characters who intend me harm, and saw how the pieces would play out enough in advance enough to get out of it, or at least to realize there was only one, very unpalatable way out of it.

Shields up.

Too many times in life, I've had an angel whisper in my ear with only a few hours or seconds to spare to keep from being robbed blind by people I made the mistake of trusting.

Too many times in life I've paced in some anonymous hotel room, wondering "How the hell am I going to do this once the day comes?"

Too many margin calls have had to be met.

Far more times than I would care to, I've found myself confronted with the proposition of having to throw boxcars to survive, and I find myself, yet again, with that very proposition in a life and death context.

Only someone who really loves the rush of the markets, could enjoy wanting a given market to move in a specific direction. I've come to the conclusion it's far better for me to set up to profit from whatever direction things move in on a given day. Those that dont move in a manner so as to profit from this day, will tomorrow, or the next day, or the day after that… I need to just show up on time with my shoes on, collect on that which comes in today, sow the seeds today for taking profits on something at some future date. It's not difficult, and a lot more satisfying.

There's enough episodes in life we need boxcars to show up, and yeah, "Baby needs a new pair o'shoes."

Victor Niederhoffer writes: 

I like all these untested ideas about moving averages but my query was of a more general nature. What kind of moving average, perhaps its top onion skin an exponential average, is the best predictor of human happiness. I.e. if you are happy yesterday and unhappy the day before, are you happier or sadder. I mean vis a vis the pursuit of happiness, not markets, although the two are related I think.

Alexander Good writes: 

My answer would be a medium term moving average works best - about 6 months. We're naturally geared to notice acceleration not speed. After accelerating happiness, it's virtually certain to decelerate which we would have a heightened awareness of. Thus a 5 day moving average would have too much embedded acceleration and deceleration to yield a good outcome.

I would also say 6 months is a good number because there's a fear of 'topping out'. I.e. if you're at the peak happiness of the past 5 years you might get afraid of a larger mean reverting move. 6 months is short term enough not to be victim to noticeable accel/decel, but not too long to be subject to such existential thoughts that lead to unhappiness. 2 quarters is also a good timeframe for evaluation of back to back 3 month periods which seems like a relevant timeframe to most people professionally.

My meta question would be: does measuring one's happiness with a moving average make one more or less happy? 

Theo Brossard writes: 

I would pose that happiness would exhibit similar behavior with market volatility. Short-term clustering (which makes exponential average a good choice, if you are happy today chances are you will be happy tomorrow) and longer-term mean reversion (there must be some thresholds defined by values and time–you can't be very happy or unhappy for prolonged periods of time).

Jim Sogi writes: 

A good way to study this is to rate and record your happiness each day. Also record your acts: exercise, diet, work, family, vacation, tv, meditation, etc. Over time you can correlate the things you do that make you happy. You could correlate day to day swings as Chair queries in a univariate time series.



 Yes, I think the following is relevant to trading, counting, regime changes, confirmation bias, the lizard brain, and the struggle to understand whatever we can define as objective reality.

"Placebo Effect Grows in U.S., Thwarting Development of Painkillers":

Drug companies have a problem: they are finding it ever harder to get painkillers through clinical trials. But this isn't necessarily because the drugs are getting worse. An extensive analysis of trial data has found that responses to sham treatments have become stronger over time, making it harder to prove a drug's advantage over placebo.

The change in reponse to placebo treatments for pain, discovered by researchers in Canada, holds true only for US clinical trials. "We were absolutely floored when we found out," says Jeffrey Mogil, who directs the pain-genetics lab at McGill University in Montreal and led the analysis. Simply being in a US trial and receiving sham treatment now seems to relieve pain almost as effectively as many promising new drugs. Mogil thinks that as US trials get longer, larger and more expensive, they may be enhancing participants' expectations of their effectiveness.

Stronger placebo responses have already been reported for trials of antidepressants and antipsychotics, triggering debate over whether growing placebo effects are seen in pain trials too. To find out, Mogil and his colleagues examined 84 clinical trials of drugs for the treatment of chronic neuropathic pain (pain which affects the nervous system) published between 1990 and 2013.

anonymous writes: 

The placebo effect is evidence of susceptibility of the population to influence. Past research shows that the more people are stressed, the more they are susceptible to influence. The original research was done by Pavlov (the dog guy) and the results had a major impact on brainwashing techniques in the last century. Stress people enough and you can convince them of just about anything. Brave New World Revisited.

Who does this benefit?

Russ Sears writes:

This of course is why an investor should not listen to the news in a down market. Once under the stress of losses, people look for "influencer" and all the perma-bears, con-men and fear mongers are lined up to offer their snake oil pain relief through the news media. 



 Monday, October 19th is the 28th anniversary of the 1987 crash. As I was a young pup in junior high school in Queens, NY at the time, I certainly remember the reaction around New York be it media, neighbors, etc. I even watched my father pretty much chug a scotch when he got home that night and he is an Accounting Professor who never drinks and is certainly not of the speculator ilk. (He likes his drift nice and slow) For participants who lived it, what is the best thing to do in that situation? Certainly, taking out the canes is warranted for best of breed stocks. But does one start thinking differently, would a past in a form of martial arts training, boxing, or Krav Maga be of help? I can't help but think of the value of situational awareness as is taught to fighter pilots. Any insights would be appreciated.

Jeff Watson writes:

That week in '87, the grains had a magnificent sell off, which made many locals millionaires. I know that I had a good year in a 7 day trading period. That rout was almost as good as the Chernobyl disaster a year and a half before when one was able to sell as much grain as their account would carry……at the top. However, Chernobyl had some tectonic shifts which caused mini quakes for months. Lots of newly minted millionaires on the 19th, and the existing trade didn't get hurt that much so it was good business for all.

Russ Sears writes:

This, I believe, is a great question for sports psychologists. Visualizing your actions in a stressful situation and deciding ahead how you are going to react is very helpful. Then when the pressure comes your instinct is much more likely to go with what worked in your visualization rather than choke, flight, or freeze. You are even able to choose your fight tactic.

If I would have known this in 1992 at my peak in running but novice at the marathon, I could have been an Olympian. The USA competition was weak that year and I was at my prime. But when I hit 20 mile mark in the LA marathon at 1:41 time of change but also hit the wall soon after and crashed and burned because I eased up rather than pushed through it. That pace was easily the fastest pace for a USA runner up to that point that year if I could have head even close to it.

On active trading I found though that much of the stress comes from watching the market too closely so that every jump seems to need preparation. But basic risk management says to have a cash contingency stored for a short emergency use whether it's a stock crash or a bout of unemployment.

Mr. Isomorphisms writes:

Five minute miles. I just can't wrap my head around that.

Russ Sears writes:

Easier for those who run 65 second 400's than those who run 11 minute 2-miles, imo.



 This strange, ancient mariner guy shuffles over to us as we stand, 8:30 pm, in the short but growing queue outside Alice Tully Hall, where the movie will have its world premier at the 53rd Lincoln Center Film Festival. His hair flyaway, his body flapped in summer wear too light for the evening chill in the early autumn air; his skinny height curved in a cautious concave half-parenthesis.

"What movie?" He demands.

We tell him, "The Walk."

"Great special effects, average story…" he mumbles, wandering off uptown. We yell after him: "Have you already seen the film?!" He doesn't turn back. He's off to other adventures, the albatross having evidently flown from his back.

When we get to the auditorium, seated very close to the stage where a moderator introduces director Zemeckis and a dozen of the producers, photographers and lighting geniuses that created a 3D worth the time and effort it takes.

Behind us, Philippe Petit grins from a balcony in a floodlight illuminating his pixie genial face and those of stars Joseph Gordon-Levitt and the piquant female lead, delightfully named Charlotte Le Bon. From 'way up front, we can't see if co-star Ben Kingsley is also waving down at us all; the angle is wrong. The vast 2,000-person audience smiles and claps, delighted with our privilege at seeing the real deal, the actual tightrope walker, himself.

We weren't prepared for the gripping suspense of the story, as Petit/Gordon-Levitt goes through an amazing series of 'wire-walks' in his native France, sneaking into closed-for-the-night circuses, entertaining passers-by on the streets of Paris. Neither were we prepared for the spectacular and, frankly, eerie special effects of the film that spookily recreates the World Trade Center, up-close, constant, right there in front of you.

We know about blue-screen and all, but this work is altogether dizzying with verisimilitude.

The big shocker is that this meticulous planning of a caper plays like a heist, and we are along for the prep, the setups, the disappointments, the last minute reprieves, the heart-in-your-throat anxiety—will it work?

Hate to say it, but the Petit-gathered "accomplices" that Petit/Gordon-Levitt recruits to traverse the abyss of the 110-storey-tall towers gathers undeniable force, aided by the masterful stars and the outrageous effects that create both the height and the depth of the now-demolished Twin Towers. There is compelling movie-making here, as the plan to wire-walk between the buildings is, of course, illegal, daunting, unheard of. Crazy, sort of. You really can't figure out why anyone would do such a thing, even if their lifelong love is walking on wires without a safety belt—and without even the suggestion of pay.

Don't know if others felt as unnerved by seeing the towers in the glimmering distance and immediately in our faces, remembering that they are no more.

Of course there is no mention of the coming destruction of 9/11, as this was all done in the planks and wheelbarrow days of the WTC construction effort. Back in 1973 and '74, before the concept of al Qaeda was even a speck in the eye of Condoleezza Rice, Donald Rumsfeld or George W. Bush.

Not a swear word to be found, nor even a teeny sex scene. (Two chaste kisses, okay.) The focus is die-straight. And despite our misgivings about the tragic future of the vaulting towers, It elicited round after round of applause at the final shot. There are a few out of chronology fails we caught, but most people will miss them, or won't mind. Even the doubters, like us, were wowed by the effort, the acting, the filming, the suspense, the dizzying strength of the effective and powerful 3D, which really makes you jump, cynical as you think you are.

Even kids can appreciate this goal-focused tale—and how often can you say that about adult films nowadays?

And "average"? This is no average walk in the park.

Jim Sogi writes: 

In the 70s I was a delivery boy for my father's Wall street law firm. One of my deliveries was to the lower floor of the still under construction World Trade Center towers. I thought while I was there I'd punch the high buttons on the elevator. When I stepped out, there were no windows up a 100 floors and the wind was whistling through. On that bright summer day I could see to the ocean and the mid west, almost to California, or so it seemed.

Russ Sears writes: 

Mr. Sogi's story, the review of the movie the Walk and the conquest of Mount Everest by Mallory all remind me of the days I would go out on a early Sunday morning run going over a marathon distance at a pace that wins most amateur marathons. There were plenty of memorable sights a few wild adventures and plenty of solitude with nature outside and within me. But the reason I did it for as long as I could was a slight variation to Mallory's supposed quote, "because it's there"…. No it was "because I can". Despite what one might feel about a deity or nature, this time spent experiencing my world on the edge of what's humanly possible, assures me that conscience experience is at the heart of existence. Perhaps through quantum mechanics this connection can be quantified. 



 On my last haircut before moving, I gave my regular lady a $100 tip on a $17 haircut (applause line here?). That small gesture brought her to tears. She is a very interesting older woman. I've enjoyed talking with the past few years. She knew I worked in investments/trading and asked if I had any ideas for her. I asked about credit card debts and she told me she just cashed in 25K of an IRA to pay down 25K of credit card debt, yet already had accumulated 2K since then and was getting in the hole again. I might invite her down to do some murals in my kids room, and perhaps do some studies on trees (She is an artist who made a living cutting hair for the last 40 years).

The point is (perhaps? At least the relevant one?) is the deadly financial problem of never having working capital that provides the flexibility that keeps one off the spike of usurious interest.

This lady had been sold on long term investments (by her branch XYZ big box bank) in high fee mutual funds with perhaps at best a 5% yr expected value over the long term, while paying off 25% interest rates on credit cards. The scams run on the lower middle class or working class are obscene.

And it is not income. Clearly if these folks can pay these obscene high interest rates, they can afford much more than they have. The problem is that they never understood the idea of having "working capital". I told my friend that her best investment is at least 6 months of living expenses in the bank. As basic as it is, and at such a low margin for error that standard that is, for many it is an alien concept. Her recent issue was a car repair that blew up her budget and started the credit card problem again. With no working capital plus compound interest against, it is like a giant pit metaphorically with wood spikes and lions at the bottom to gobble one up.

So in trading and investing, how can we use this idea? Victor has taught "never get in over ones head" as one of the key tenants of speculation. So how do we manage our cash in our speculations, investments, life's "issues" to have the flexibility to seize opportunities and avoid pit of being bent over a barrel–while still getting a solid return.

Scott Brooks writes: 

The problem is deeper than that.

The people that Ed is referring to don't have the mentality to accumulate wealth and get rich. They are sold on the "here and now" mindset. They go into debt to satisfy the here and now. Something will always come up that will prevent them from succeeding. The only thing they are really good at is coming up with PLE's (Perfectly Legitimate Excuses) to justify their failures.

They are defined by their failures.

anonymous writes: 

Especially with respect to this site, I would wonder the data and testing behind those assertions. Otherwise, one might consider them to be presumptive, elitist, and uncharitable, with mean-spirited implication. But for the grace of god….

Ed Stewart writes: 

"presumptive, elitist, and uncharitable, mean-spirited"

Yes but who cares. I'm guilty of most those things at most times. Is time preference the essence of trading? That might be a more interesting question vs. my original one. Can it be quantified? I think so, as a hypothesis generator. Does it work better than other thought models?

Russ Sears writes: 

Sorry, I disagree Scott. Ed is correct, it's a matter of education and coaching. Have a plan, believe in the plan, stick to the plan.

The average working poor Josie is not a loser. It's the average bank has learned they are more valuable dumb and paying fees than smart with small accounts. The stats say that the fees are several hundred dollars per person in the USA. So some are paying several times that. The banks have the average poor working single parent or mom in a snap trap that they can't figure how to unsnap and lift the door.

The first thing I tell kids is that you need a minimum of $1,000 in emergency cash preferably $2,000. Have a garage sale, stop buying lottery tickets, no gambling, stop buying new clothes, stop cable, and stop smart phones, etc until you have that emergency fund. Also budget, if you can't fix the budget to the pay, downsize housing, get roommates, no car, bus, pay for car pool, whatever it takes to have a workable budget. Then save for the 3 to 6 months expenses in a cash account ready for a big expense. Only then should you invest.

Most people in this problem don't have anyone they can trust to give them the advice and perhaps the tough love they need to stop living in denial. The truth is the banks want the poor.

What does this mean for "investors". Frankly I think most investors have it wrong. It's not so much managing your risk as it is managing your cash flow first, then manage your risk. You can take a lot of equity risk if your investment horizons 20 years out.

Also the lesson to investors is just because someone is in the best position to give you advice and would make some money off you if they gave you that advice, it doesn't mean they will give you the advice that's in your best interest when it conflicts with their best interest. Their best interest is CMA (cover my …) by silence or sin of omission. Then it's to make more money by selling what gives them the most profit to "cover" you like payday loans.

anonymous writes: 

The thing I practice (and I don't know if it adds any edge that can be computed) is to always take some off after a good run. No mater what, be it trading, investing, bonus, etc. Never spend it all–or even most of it. Put it away for when SHTF, because as day follows night, it will…

Andrew Goodwin writes:

A major part of the problem is the thinking that makes the credit limit on credit cards equivalent to ones own money.

For my part, I will never willingly stop at a gas station that has two prices for gasoline with one higher for the credit card user than for one paying cash.

In a world where there are card rebates on gasoline, what is the point of acting responsibly with credit when those who did not act responsibly get subsidized by those who did. The dual pricing also serves to support a cash economy against the public interest.

Peter Grieve writes: 

I feel that I am unique on this site as having been in this hairdresser's situation for most of my life (Hello, Peter). Obviously this is not due to a lack of economic education or upbringing. I feel that the factors include a lack of skepticism regarding my own appetites, a lack of faith in the future, a certain immediacy in response to the world. These are traits associated with immaturity, to which I confess. Of course this leads to tremendous inefficiencies, even when viewed from a purely hedonistic perspective, but it does have its compensations.

I do not regard Scott's comments as elitist, presumptive, uncharitable, or any of that baloney. On the contrary, I find the the use of the word "uncharitable" to be condescending. I do not feel that people in my position are a fit object of charity.

Everyone has their irrationalities, and they are often incomprehensible to those who do not share them. Scott's words are simple, honest truths, which many people (including me) would benefit by internalizing to a greater degree.

Stefan Martinek writes:

It is good to have an emergency cash for at least a decade; locked, untouchable for trading or similar. The rest can be at risk. And after MF Global steal from client accounts (is Corzine still free?), I think it is prudent to keep as little as necessary with FCM. In case of a brokerage failure, the jurisdiction matters (Switzerland is preferred, the UK is too slow but ok, then Canada, and the last option is the US broker).

Ralph Vince writes: 


I entirely disagree; emergency cash has a shelf life which is very short, and our perspective warped as we are speaking in terms of USD. Being the historian you are, you know full well how quickly that cash can be worth nothing. (And again, a many of our personal experiences here would bear out, money is lost far quicker than it can be made).

A bag of air on hand is good for one breath.

People are taught that "saving" is virtuous, borrowing a vice. I would contend that we have crossed to Rubicon in terms of the notion of stored value — no more able to contain that vapor than we can a bottle of lightning. The circulation brought upon by a zirp world, turning all those with savings into the participants at a craps table, the currency being used the product of a confidence game, among the virtues to be taught to tomorrow's youth is that of creating streams of income — things that provide an economic benefit their neighbor is willing to pay for, as opposed to a squirrel's vermiculated nuts.

"Stored value," is a synthetic notion we have accepted and teach as a virtue. It has no place in nature, it is a synthetic construct, one that is not scoffed at in the violent, life-and-death world of fire and ice. Young people need to be taught the fine distinction between the confabulation of "storing value," and that of using today's fruit to generate tomorrow's.

Stefan Jovanovich adds: 

From the other Stefan: I agree Ralph. "Stored Value" is another part of the economist dream that platonic ideals can be found. Money is and always has been one thing: the stuff you could voluntarily give to the tax man that would make the King find another excuse for throwing you into the dungeon. The gold standard did not change that; it simply gave the citizen a chance to make the same kind of unilateral demand on the government. It is hardly surprising that the fans of authority and "government" hate the Constitutional idea of money as Coin. How can you have a permanently elastic official debt if the citizens can ask for payment in something other than a different form of IOU?

However, Stef does have a point. Having a hefty cash balance is a wonderful gift; it gives you the time to figure out your next move. The sacrifice is the absence of leverage; the gain is having literally free time.

Scott Brooks comments: 

There are a lot of companies out there that take advantage of them and the bad advice they were given from their parents. Banks certainly do. Then you've got insurance companies and brokerage firms selling them crap products as well.

But that doesn't hold water in today's society with Suzie Orman and others like her being nearly ubiquitous on the airwaves and net.

These people live beyond their means. Plain and simple.

Yes, they lack education, but even with education available, they don't take advantage of it. They are just doing what they were taught as kids. For far to0 many of these people, as long as they've got enough money for their 1-2 packs of cigarettes/day and their quart of Jack/week, they go and live lives of quiet desperation, hoping that they don't lose their jobs and are lucky enough (i.e. like not spending money on stupid stuff is "luck") to pay off their debts by the time they are in their early/mid-70s so they can live out their remaining few years (if they even make it that long) on social security.

I know. I grew up with these people. I know how they think. But for grace of God (as was mentioned earlier), I might have been one of them. But for some reason, I was blessed with gray matter that works, and I saw the error of those ways, and I was able to get out.

Ken Drees writes: 

I knew a guy–lost touch with him over the years–who exclusively dealt with hairdressers and salonists. He sold variable annuities to them since these people had no retirement plans given to them from the salon owners. I believe in his mind that he was doing them a service–and I really do not know the quality of his products–but at a glance I saw them as mutual fund annuity hybrids that came from heavy fee fund families. He was a tall, dark and handsome gent and he would actually get entire staffs of salon ladies to invite him in after hours for a group meeting/financial planning discussion presentation.

He always said that business was brisk! 

Jim Sogi writes: 

When young friends ask me, how should I invest, I give them a simple asset allocation model based on ETFs or Vanguard and an averaging model. Invest x% of your paycheck off the top each time. Doesn't matter how much really.

Russ Sears writes: 

 Scott, since this is the DailySpec let us bring a little science into the discussion, even if it is social science.

Where we differ is not what is causing the hairdresser's problem. It is in what can be done about it that I differ. I believe you can coach people to delay gratification. I coached kids that never did homework before and got "D's" and "F's" during a summer and by fall the kid was an "A" or "B" student. You probably owe a hardy thanks to the coaches in your life.

Perhaps the greatest social science finding has been the "marshmallow experiment" done at Stanford. They did test on 600 4 year olds telling them if the child did not eat a marshmallow for 15 minutes after they left, they would get a second marshmallow. 1/3rd of them made the whole 15 minutes, a small percentage ate it immediately after the others had waited various amounts of time. They followed up on these kids several time in the last 40 years. Just about every way you can think of to define success was highly correlated with the time the 4 year old delayed gratification: SAT score, college/HS graduation rate, credit scores, long term committed relationships, contentment etc. And almost any way you can define failure was inversely correlated: jail time, high school.

The correlation was stronger than IQ, social economic status at 4 years old. In other words even the dumb poor kid that delayed gratification was happy/content/successful 40 years out. He may not be making much but he is happy with it.

For a humorous view of this experiment reproduced: Joachim de Posada: Don't eat the marshmallow! 



One notes 23 times when the S&P has been down 30 on a day and 100 big points on 7 day since 1998. Average more 3 days later 20 points, 12 points next day 6 of them occurred on a Friday. 2 days later market up 26 points. 5 of 6 up. Results similar for market down 100 points on 10 day basis. The current market is down 100 on 10 day basis and 110 on 7 day basis.

Russ Sears writes: 

Since the S&P index has not been down less than -4% for two days returns since Nov. 1, 2011 I looked at the historical S&P index. There have been 100 non-overlapping 2 days when the S&P was down less than -4% (LN return) counting this Friday. The next 2 days returns cumulative has been 58.4% or 0.59% average 62 of those 99 have been positive Max return 9.1% Min Return -28.2% (Oct. 87). 



Here are some lessons I've learned during the past 8 years:

1. Call options. If you truly have conviction, buy long dated call options as volatility tend to be under priced for long maturities.

2. Short selling. It is harder to short sell than most think, and almost no one is good at it. One hurdle is the drift, but there are countless more.

3. Romance. You're clearly better off to marry someone in management than to marry the stock.

4. Dip buying. The successful buys on dips and vice versa, it follows that the unsuccessful do the opposite.

5. Market. Everyone is always bearish on the market, only the super successful dares to be bullish/naive.

6. Story. Human brains are hard wired over thousands of years to build stories around your beliefs/thesis.

7. Flexibility. The super successful are always ready to change their mind/direction. Go from long to short or from short to long.

8. Art. Stock picking is as much art as science and very rarely are the smartest the best at this game.

9. Top-down. Local knowledge remains under appreciated. The top down guys ends up shorting the best companies and vice versa.

10. Management. Always invest with the best in class management, however you are better off with a good end market and bad management than the other way around.

Stefan Jovanovich writes: 

Yes! Especially #10. "You are better off with a good end market and bad management than the other way around". It applies even more to private business than it does to public companies. Believe me. 

Gary Rogan writes: 

#10 is a lot like the Sage's favorite. When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.

Russ Sears writes: 

Most people cannot admit when they are wrong, in over their head or incompetent. If the tide turns and a business with good economics but bad management becomes a business with bad economics and bad management, then the fraud, accounting tricks and pleas for government bailouts come out. The "smartest guy in the room" is leading the way.



 The lesson of Greece is that there is no solution, beyond inflation. When governments promise benefits more than they can afford, despite the sophistication used, the end has to be inflation. In this case the inflation has been the seen in the exchange rate. Cooperation for Europeans with the US and the world has gotten expensive.

It has been suggested that better cooperation could help. Peter G. suggest that defection is optimal for a one time occurrence of the "prisoners dilemma". But it is not the only time it is optimal. Peter G. is right that the "Tit for Tat" strategy is the "winning strategy" on a form of the prisoners dilemma repeated. But it is not the winning strategy if the outcome and motives are not knows a priori. In such a world the winning strategy evolves. If I do not know the outcome and your motives, a "bad" outcome generally should be forgiven. I should assume you tried your best but it simply was not in your control. If we continue to cooperate the odds will be in our favor long term. This is "generous forgiveness" evolves into "always forgive". Always assuming the other side is not deceiving you have the benefit of lower policing cost. Who wants to read all those agreements "accepting"and software updates for instance. But this quickly brings us back to the defection or survival of the fittest/war or deception strategy. If all accept that there is no need for police/due diligence , or certain agents are above the law or above failure, we are in the "always forgive" strategy. Have we entered into Too Big to Fail era? Are we in Greek national accounting era, the nation's cooperation is assumed, no need for due diligent/accounting can't be questioned? For a good summary of the evolution of cooperation see Martin Nowak, 26:33 minutes.

So the end is near. Lately we saw who the markets are betting on in such a survival of the fittest world, the US. But a 30 year bull bond market must end IF we cannot afford the boomers benefits. Have we entered into a period of where we cannot afford it? Has technologies hedonistic benefits left inflation a thing of the past, for the population as a whole? Rather than predict when the bull bond market will end let me say, that it is simple calculation to find the upper bond of this bull market: A 10 year bond today is at 2.28 % yield, if rates were to go to zero for all 10 years of the curve the gain would be 10 years x 2.28 % = 28 % yield. The 30 year is at 3.07 % so 3.07 X 30 year = 92.1 %. The end is near.



 We have a summer intern with us from a university where he has been taught that prices are random and markets not predictable, EMT, anyone have any data, studies etc I can show this poorly educated fellow to enlighten him?

Rocky Humbert writes: 


It sounds like you picked a summer intern from a university that is using obsolete textbooks.

Virtually no academics (including Fama) still believe in the gospel of strong-from EMH. I don't think it's possible to "disprove" semi-strong and weak-form EMH because the theories are constructed in such a way as to leave wiggle room.

If you are suggesting that all forms of EMH are incorrect, then I beg to differ.

Lastly, data mining to find low probability events (as some speclisters have suggested) does not necessarily prove nor disprove a hypothesis anymore than pointing to Winston Churchill as proof that cognac and cigars lead to a long and vigorous life. Most of the time, the market is darn efficient. And that's one reason that markets are the best way to allocate resources.

Russ Sears writes: 

Perhaps the best set of data I can think of to disprove ALL forms of the EMH is the interest rates over the last 50-60 years. In the 60's the Phillips curve took over the feds interest rate models since then the bias has been more control of the interest rates is always right. Likewise from 85 to now feds have stopped both inflation and any liquidity crisis (real or imagined). Granted it is a bit of cherry picking to calculate the chance of randomly reaching 85's interest rate levels from 1960 and then multiple that by the chance of coming from 85's levels to 2014/15 levels

I lost a job because in the interview I told the guy in charge of the modeling for a one of the biggest insurance companies that I thought he was wasting the companies money having 2 Phd's calculate the interest rate scenarios using the random walk. The company hadn't even tested any of their correlation of their interest rates competitiveness to their change in lapse rates. But they wanted to have a risk neutral yield curve monthly binary tree model built 30 year out quarterly nodes with several orders of accuracy. If you used such a model for the past 2 X 30 year periods each actual outcome would at best been so remotely possible that only a naive statistician would not see the coin flips were rigged.

I was told that the interviewer thought I was too simply and couldn't handle the sophistication of the math they wanted. Academia seems to thrive on sophistication for job creation sake, not money making sake. Not coming from the Ivies or having a Phd I assume that the only reason I got the interview in the first place was that I had made my past two companies millions betting on long term gamma, for almost nothing. So what do I know.

Even the idea behind the Feds "control" screams non-random walk. If you stifle the short term natural swings it is bound to have long term consequences. 

Gordon Haave writes: 

"I was told that the interviewer thought I was too simply and couldn't handle the sophistication of the math they wanted. Academia seems to thrive on sophistication for job creation sake, not money making sake."

That very accurately describes all of economics and everything surrounding the Fed, although it is not for job creation sake but rather for obfuscation sake. There is nothing more satisfactory than telling an economist that the fed is printing money only for them to rant and rave that the fed doesn't actually print money, and then saying "I know, but the effect is the same".

Then the response is always "it's more complicated than that". But they will never really tell you why in a meaningful way.

Russ Sears writes: 

Perhaps I should read the paper before I comment but my bigger point was to actually be a "science", actuaries and other modelers need to form a hypothesis/model and THEN look at the actual results to at least adjust that model if not scape it altogether. The math is made to predict the data. Not the predictions must be based on the beauty of the math theory Otherwise it is a philosophy not an art.

Academia loves philosophy because it implies the philosopher should be in charge. They dispose science because it implies academia must be humble to the wisdom of the crowd. If you're predicting rate of change long term then it is not enough to validate your models using first order changes such as lapse rates. You must validate second order effects such as shock lapse rates and long term drifts. It shows it gets messy when the philosophers are in charge.



 If pride goeth before the fall, what is the opposite for the individual spec?

Re-discover humility and endurance before the win…

Russ Sears writes: 

The logical contrapositive to "if you have pride first then you fall" is "if you win then you had lasting humility". I believe this is what most of the great coaches teach. For example, Wooden, and Bobby Knight both espouse you have to prepare and practice like your team is the least talented and least "gifted" players or team out there. Then come game time believe your players/team is the most prepared confident in execution team on the court. In other words, practice is the time for the players to think and work and believe in the coach's system. Game time is the time to enjoy the flow and automatize and let the coach worry about the thinking. For runners I would say have a plan, believe in the plan, stick with the plan and then the racing is easy.



 In January of this year Forbes published a piece by Michael Lingenheld of Cup & Handle Macro reciting the known knowns about the new car business:

1. Average duration new car loans - 5.5 years
2. Sub-prime borrowers are the debtors on roughly 1/4 of total outstanding car loans
3. Delinquencies for car loans made in 1st Qtr. 2014 as of November of that year - 2.6%
4. First year delinquencies for car loans made in 1st Qtr 2008 - 3%

IBD has a more recent story with the same "news".

ALLY, the largest auto lender in the U.S., just had its most recent flooring loan Master Trust rated Aaa by Moody's.

Russ Sears writes:

While this is true is it anything new? Aren't auto dealerships and manufacturers like farmers–prepared for a few bad years and if the cycle is deep and broad enough the Feds have a history of stepping in?

Stefan Jovanovich writes: 

The "everybody knows" history Russ refers to is remarkably short: 2009 is the one and only time auto manufacturers and auto lenders were rescued, even though the depth of the cycles in both 1919 and 1929 were far, far worse. And the difference was?

Here, for those of you who remain curious, is a brief history of GMAC (what ALLY was before its rescue):

Founded in 1919. Initial capital: $2.5M. First branches opened in New York City, Detroit, Chicago, San Francisco, and Toronto. The following year a branch was opened in Britain. By 1928 GMAC had made 4 million retail car loans. 30 years later they had made 40 million; to celebrate, they entered the home mortgage business. 1999: Record earnings, buys Bank of New York's commercial lending unit and forms Commercial Finance Group. 2001: Further record earnings: $1.8 Billion Celebrates 150 millionth car and truck loan, totaling more than $1 trillion in total financings over its history. 2002: Another record: $1.9 Billion. Now lending in 41 countries. 2003: Earns $2.8 Billion 2004: $2.9 Billion, 10th straight year of earnings growth, begins lending in China, opens GMAC Automotive Bank 2006: General Motors sell 51% to Cerberus Capital Management
Rocky and the other pros can carry it on from there.



 I am not a conspiracy theorist, but the official explanation behind Dave Goldberg's (Sheryl Sandberg's husband) cause of death seems improbable:

"He reportedly left his room in the resort near Nuevo Vallarta at 16:00 local time to exercise, and family members went to look for him when he failed to return.

He was found at about 18:30 in the gym, lying by a treadmill, with a blow to the lower back of his head. It was apparent he had slipped on the treadmill and hit the machine, a spokesman for the Nayarit state prosecutor said."

Can someone explain the physics of how you (a) lose your balance; (b) whack the back of your head; (c) end up "lying by a treadmill". Anyone care to bet whether there is a video camera in the gym? Access control? An autopsy report from a board-certified pathologist? Are there any other examples of severe injuries to the "lower back of the head" from a treadmill?

Until I see the data, I'm canceling my trip to Nuevo Vallarta and betting that this was a botched kidnapping (Sandberg is a facebook billionaire) and is being covered up by the hotel and local authorities to prevent a tourist exodus.

Russ Sears writes: 

Treadmills are dangerous if operated at the higher speeds. What is a high speed depends on the individual working out. There are several ways to fall. In order of frequency for me:

1. Step half way off the tread.

2. Power outage due to either over heating motor, or simply power failure.

3. Pulled muscle or cramp.

4. Sudden distraction

But at hotels it's often due to improper maintenance, such as a loose tread or over heated motor. 



I did some graphs of SPY Frequency Distribution in 5 different regimes (1993-1999) (2000-2001)(2007-3/2008) (3/08- current) (1/1/2015 - current).

The noticeable difference between Bulls and Bears regimes is twofold:


Bulls: higher percentage of days that are boring > -0.5% and < + 0.5%

Bears: lower than normal.

*Second finding,

Bulls: fewer terrible days < -0.5%

Bears: more


About the same percentage of great days > +0.5% in Bulls or Bears case

This used lognormal returns.

Graph 1 3/2009 to now



 I'll just throw this out.

Intuitively, I suspect that if a fraction X gets better on a placebo, and if a fraction Y (which could overlap with X) gets real physiological benefit (as determined the by the deities), then the fraction that will REPORT being better would be something like sqrt(X^2 + Y^2). (The "reasoning" is that the real effect and the placebo effect are probably uncorrelated and therefore "add" in an orthogonal way, like the Pythagorean theorem.)

So if X is 0.6 and Y is 0.4 then 72% of people in the study would say they were better.

Of course this won't be valid if X^2+Y^2 gets close to or exceeds one.

Anyway, if that formula is right, and if 40% of people really do benefit as determined by the deities, then we'd see 72% reporting that they're better, which is not much more than the percent that "respond" to the placebo, 60%. So it's probably hard to smoke out an effect, even if it's kind of big.

anonymous writes: 

Before any marathon or ultra, you hang around in the corral of runners waiting to go, (towards the back. towards the WaaaaaAAAaay back, with the jockeys, fat ladies, kids dribbling basketballs) and ask practically ANY old guy if they take it, they will tell you affirmatively. I've done that at least dozens of times. Then look around at who has had a knee replacement and is in that category. No one.

Now that does not mean that the prevalence of old guys running marathons now (whereas two or three decades ago you didn't see that, may be a function of fad, but I remember old guys who ran two or three decades ago stopped running– almost all of them because "their knees couldn't take it anymore," or they "wore out their knees.") is a result of G&C consumption, or the fact that there are so many more older people running now, the fad effect.

There is a tendency to mock anecdotal evidence such as this– but our entire lives are spent accumulating anecdotal evidence and attempting to draw conclusions, from what we consume, what the "best" route to get to a certain destination is, what time we ought to wake up, to how we trade, etc. Everything we do in life is an attempt to solve an optimization problem based most often on a statistically insignificant number of data points.

David Lillienfeld writes: 

First, I'm a physician and among my areas of expertise is the evaluation of drugs (pharm, not abuse). If you want to use anecdote, then you must have little use for regression to the mean. Anecdotes are subject to publication bias, small numbers, inadequate control of bias, among others. It is human nature to work off of anecdotes. It is also misleading.

Based on anecdote, radical mastectomy would still be the standard of care for breast cancer. Based on anecdote, rehab after a heart attack would consist of sitting on one's butt for six months "for healing." Based on anecdote, there are any number of medications one might use for treating pulmonary fibrosis. They actually don't do much. None of them. Based on anecdote, laetrile would be the nectar for cancer. Guess what—it isn't. So if you want to run on anecdote, go right ahead. But don't be surprised if your results are random, because that's what's happened in medicine based on anecdote. It's the reason why evidence-based medicine has emerged from the shadows. And don't forget that regression to the mean. Relying on anecdote goes right up there with physician self-treatment of disease. BTW, my uncle treated himself for a heart attack. Wrote the orders for morphine (it was 1960). Managed to kill himself with an overdose. In the hospital.

Second, vitamin C has been looked at for any number of diseases. For the common cold, there's lots of hedging by the Cochrane Collaboration, but I'd hardly call it something where they see compelling evidence—at least for the common cold. Linus Pauling may have thought he was onto something. He was brilliant, some would say he was a genius. That doesn't give him a pass on evidence. Ronald A. Fisher believed cigarette smoking wasn't—couldn't be—a cause of lung cancer, and he was mystified by the increasing mortality rates from it. The same was true for Jacob Yerushalmy. There's a fellow in San Francisco, generally acknowledged as brilliant (he may even have a Nobel) who maintained that HIV wasn't the cause of AIDS. Genius isn't immunity from being wrong. Conjectures in science, even from geniuses, need evidence to be considered worthy of incorporation into the corpus of scientific knowledge.

I had two good friends, Bill Cochran (he of Cochran's Theorem and Abel Wolman talking at a symposium on the history of epidemiology. Cochran observed that "Evidence is a bitch." Wolman replied, "At least evidence is visible. It's the non-visible things that will get you every time." Wolman made his reputation in sanitary engineering (as it was then known) on figuring out how to get sufficient chlorine into tap water as to kill the cell present in it while maintaining that water's potability. Threats that weren't visible was his stock in trade, so to speak. But these were philosophies of science, not specific research questions.

Third, the pharmacokinetics of vit C do not suggest that more is better, ie, always gives a higher serum concentration.

Sorry about the length of this message, but it's worth noting that saying, "Guessing is a capital crime, and if you engage in it, you will lose your capital and become a criminal." I wish I could remember who said it. Can't though.

Ralph Vince writes: 

I don't disagree with you (more specifically, I'm not qualified to disagree with you on this even if I were inclined to), however, as infants we learn to speak, and before that even, in our earliest life hours, we learn to learn by optimization based solely on the sparse data set of anecdotal evidence.

It's a platform that has certainly served us well, should not be disparaged, but rather ought to be acknowledged as perhaps not always best when other determination making platforms are available.

Jim Wildman comments:

Properly done full squats are excellent for strengthening knees (assuming no preexisting damage, only weakness). One of the surprising things I've found since starting powerlifting 4 years ago, is that a lot of 'knee pain' can be corrected through better mobility (ie, stretching). New power lifters of all ages typically have to work on hip and ankle mobility before they can successfully squat. Once you have the mobility issues corrected, building strength is a matter of patience and diligence.

Russ Sears adds: 

My wife, a RPh, thinks it MAY help, because it does seem to increase the lubricant on the joints.

However, firstly, this effect takes 2-3 months of use to develop this effect, The placebo effect is much more immediate. And most users think it works much quicker than the measurable effect to the body.

Secondly, it may simply be self selection, since as Jim and others suggest. Those willing to stick to taking 3-5 large pills a day are usually the ones willing to exercise. Diet also effect it.

Thirdly, many drugs help cause the desired response to the body, but create other problems to produce that effect. For example lowering cholesterol, but also side effect of lower calcium/electrolyte for the heart. (this is why I avoid supplements in general)

Fourth, it is not a "cure" but a MAY prevention future flare-ups, it MAY mask the symptoms. And people with arthritis have various rate of deterioration. Hence, needing a large group to determine if it helps.

With this said, many doctors and pharmacists do recommend using it. 



 As most of you know, we've home schooled our kids for years. This past year, my three younger kids decided to go to regular school.

My son Hunter takes a business and finance class and the teacher has asked me to come and teach a class of 250 kids (in the auditorium) about investing and risk management. This will happen on Feb. 19th.

He'd like me to give a power point presentation for 45 minutes and have 15 minutes of Q&A.

Believe it or not, I've never taught high school kids before in a situation like this or at this level.

What would you all suggest to me as good subjects that would be interesting and semi-entertaining (or at least attention getting) to keep a group of 250 kids engaged for 45 minutes and cause them to want to answer questions for 15 minutes.

Any thoughts would be appreciated.

Thank you,


Rocky Humbert writes: 

Perhaps start with a quote from Albert Einstein, "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't pays it." The power of compounding is what's behind everything. If the kids come away with the understanding that a penny saved is much more than a penny earned, you will have accomplished a lot. It's vastly more important than stocks or bonds or risk. And the power of compounding is not just about money. It's about studying and investing in oneself. That's a life lesson.

Russ Sears writes:

Here is an idea: Light a match, set off a small fire-cracker, then blow out the match…. Then explain how risk management is about never letting fires get to big that you can't extinguish them. That an occasional small explosion can keep life fun. And managing explosive potential is key to never letting yourself blow-up.

Then show them a live trading screen, tell them billions of dollars are made and lost every day.

Ask "Who wants to be a millionaire?". Tell them how they can become one by monthly investment and compounding interest at few rates until X years. Use the same amount invested in stocks, S&P compounded.

Finally, ask if they know how much they will spend on 4 years of college. Use that lump sum how much it really cost to pay it off after interest over 15-20 years. Show how that much actually invested in stocks could pay over a 20 year period.

Tie it all back together with they need to manage debt, savings, emergency funds, risk management.



Inflation or deflation spending has more to do with risk taking than we think. Beyond the filled holes or broken windows and useless buildings, it discourages risk taking businesses. Subcontract with the Government is safe and discourages taking risk on businesses that might fail.

In the past the risk adverse old age savers put money in the banks and pooled their funds to get those who were willing to take risk and had the know how and quantity of scale to invest efficiently with diversified risk taking putting that money back into the economy. The problem right now with deflation and QE is that the government is basically paying banks to deleverage, hence as the boomers become less risk adverse and stuff money into banks and safe investments. Those receiving the "savings" are being discouraged to take any real risk with it and told to leave it in Fannie and Freddie, now really government institutions with a very thin glass wall between them.. Instead of quantity of scale and diversified risk taking knowledge, now you have quantity of To Big to Fail and government insiders.

So basically you have those risk adverse savers giving money to risk adverse bankers with "connections" BUT no real expertise or incentive to take risk with it.



 Boomers are retiring.

A. their productivity is going down.

B. They are consuming more than they are producing.

Therefore, C. they are ultimately inflationary.

The store of wealth of the boomers, however, does slow down the Velocity of money. Hence the money created now, is not causing inflation due to the "higher savings" rate or in many cases "lower leverage rate" of both private and companies.

But to perhaps ask for a further explanation: People do "consume" despite deflation, but they stop storing value in assets that are deflating, i.e. houses and real estate in general. Instead they store value in cash and short term liquid holdings…. hence slowing the velocity of money and further causing a deflationary spiral.

While stopping building houses nobody really needed would free up resources to more productive uses, it also was the most common way to leverage, again both privately and for financial companies, and hence a massive slowdown of money turns from hand to hand.

What am I missing?



This time of the year people often consider rebalancing their portfolio. So naturally the question comes up how to rebalance.

Should a person bet against last years trends, a "reversion to the mean" strategy?

Or should a person do the opposite?

That is should a person continue to follow the trends? To quantify this question, first I had to determine what is a "good trend" and "what is out of favor".

I started with the SPY (S&P spider) and compared each sector to it. However, a direct 1 to 1 comparison is not fair to the less volatile sectors such as utilities to compare them to the faster moving sectors such as tech or financials since 2007. To find the speed of each sector I used the prior years daily log normal returns compared to the SPY daily returns. These speeds are usually relatively constant, but since the crisis, the "financial sectors" speed has changed considerably from year to year.

Once I had a relative speed I was able to look at and "actual less predicted" comparison for each year for each sector to determine if its performance was "trending" or "out of favor" compared to the S&P. The predicted = the "speed X SPY return for year. The "actual" was the sectors log normal return for the year. If the sector out performed, the "actual - predicted" should be positive. And if its out of favor negative.

Since following a trending sector or not, is basically is a yes or no question, if it was totally random the chance of a trend continuing or not should be 50/50 like a coin toss. Therefore, I used the cumulative binomial distribution to test if it is statistically significant to follow the trend or bet on reversal. if the results of the binomial dist. are close to 0% a reversal strategy is statistically significant. If the distribution is close to 100%, a trending strategy is statistically significant.


A little about me: currently I am taking a break from the markets, except for managing my own money. This is after 25 years at 2 different insurance companies as a investment actuary specializing in risk analysis. I am teaching high school math, from 8th grade to 12 grade pre calculus. I may teach some night classes next year at NWOSU, once I get 12 credit hours of teaching courses. With the 5 lesson plans everyday I prepare and the college courses I am pretty busy when classes are in session. Within my course, I am trying to introduce the markets to the students. This semester I will have the all classes invest about $2,000 of my money and give the classes any profits for their Senior year prom.

My future aspirations would be to set up a insurance company that has cost effective delivery system and meaningful yet meaningful analysis to help the middle class manage risk and investments better. I have some ideas on how to do this. But it will be a few years, before I am ready.

In general, the results imply in recent years:

Follow the trend in Consumer Staples, Financials, Energy, Consumer Discretionary, Utilities and Materials
Trend does not matter in Health Care or technology
and Reverse the trend in industrials.

To find the "2015 expected overperformance/(underperformance)" for each sector I did the following: (Binomial Distribution - 50%) X (2014 Actual -Predicted)

I get the following expected over/(under) performance percentages

Utilities 3.4%
Consumer staples 2.1%
Industrials 0.8%

Health Care 0%
Technology 0%
Financials (0,4%)

Consumer discretionary (1.0%)
Materials (-1.4%)
Energy (-4.5%)

Below is a comma delimited file of the results.

Log Normal Returns ,SPY,XLY,xlp,xle,XLF,xlv,xli,xlb,xlk,xlu

Speed Estimate Relative to S&P,,XLY,xlp,xle,XLF,xlv,xli,xlb,xlk,xlu

Actual - Predicted,,XLY,xlp,xle,XLF,xlv,xli,xlb,xlk,xlu

positives,,XLY,xlp,xle,XLF,xlv,xli,xlb,xlk,xlu,Total yr.,binomial yr
total sector,,,12,11,9,6,11,7,8,6,10,80,92.2%
Binomial sector,,98.9%,96.2%,77.3%,22.7%,96.2%,40.2%,59.8%,22.7%,89.5%,92.2%,

same sign as last year,,XLY,xlp,xle,XLF,xlv,xli,xlb,xlk,xluTotal yr.binomial yr
total sector,,,8,10,8,9,7,6,8,7,8,71,75.4%
binomial sector,,,69.6%,94.1%,69.6%,84.9%,50.0%,30.4%,69.6%,50.0%,69.6%,,00.0%



Tis the Season by Russ Sears

Tis the season
angels bow their heads in shame,
Children joyful chorus sing,
Pure snow-angels sparkle
in the sun,
wise men go long Youth.
Mother’s love takes
center stage,
families gather round to taste the past
And drink to the forthcoming.

Tis the season angels
cover their eye and cry
Children’s hope soar past their wings.
The night sky never
shined so bright
young men’s candles burn.
Fathers are the focus
of a group embrace
families gather round to give from the past
And make vows in Faith.

Tis the season
angels lose their halos,
Children’s hugs outshine their aura.
All the miracles again
twinkle like new,
kids dream the impossible.
Babies are the middle
of everyone’s hopes,
     As families gather round to relive the past
           And plant seeds of Love to the Future.



 The KC Royals were a powerhouse in the late 70s early 80s when I was in High School in Kansas City, Missouri (KCMO), Interest rates were at their peaks also. 30 years ago was the last playoffs the KC Royals played until this year. 30 years ago at the start of October was the time the 10 year CMT was at 12.54%. The 10 year has fallen ever since.

Royals are a low budget team, KCMO with teamsters/union mixed with and political corruption history. The town and the team seems to signal the fall of the unions, interest rates, local political cronyism collapse in on itself. Was 30 years ago also signal the end of the narrowing of the wealth gap? Could the rise of the Royals, signal the inverse, the end of big business and banks cronyism, the rise of interest rates, small businesses, wealth gap narrowing again? Or is this a 1 or 2 year fluke? Hopefully I will be around in 30 more years to have an answer. But I will leave a testable question for the reader, "do years where low budget teams winning the playoffs have any predictability for the small caps or markets in general?"



 All Harvard and Yale would have to do to increase their endowment by 2 billion a year, would be to dollar average, putting all their money into index funds or Spiders on a once a month for 12 month basis over the next years, and eliminate 99% of their fund managers.

Russ Sears writes: 

One of the hardest things to do is to get someone to see they made a mistake because they did not have a broad enough vision or face all the the important facts, when they did have a well thought out plan but based on a narrow approach.

Kahneman's "what you see is all there is" needs to be expanded, to include the stubbornness that comes with it. This is the real danger of modeling. A good scientific model can help you overcome your emotional biases, but models are not perfect. Admitting that the models are not reality and letting yourself adapt when they are not accurate representations of what is happening is critical. This is why I believe in "counting" except when there is a liquidity crisis.

Basing performance on a Sharpe ratio has several problems / efficient frontier has several problems that it is blind to. First, it does not consider liquidity and accounting risk. Second it is exposed to modeling error on hard to model assets. And third it is exposed to execution risk or timing risk due to over-managing "exotic" assets.

A nice accounting scheme, can make certain assets almost guaranteed high sharpe ratios for the short term. Ask Gordon about how this worked with Federal Home Bank Loans and insurance companies. But same can be said about most real estate and other illiquid assets.

Second, the models assume correlations are constant and that there is no auto-correlation within the time periods. But if any asset is exposed to runs on the them, such as home ownership, then these are not valid assumptions. Structured assets are highly exposed to this risk. But so are banks and cash value insurance companies.

Finally, those that are blind to WYSIATI risk are those most susceptible to the news. Buying high because they hear how great others are doing. And then sell at the bottom because they hear how the others made a mistake. Further, most organizations that are void of valid self examination of leadership have many second tier leaders looking to say "I told you so" for any investment outside the norm, whatever that norm may be.

I have sat through many efficient frontier presentations where the conclusion was always the same; invest more in illiquid assets, invest more in assets that are impossible to model right, and invest more in exotic assets which I knew management did not have the guts to buy low and sell high.



 What do you call it when one of your friends pretends that he's criticizing you while really praising and exonerating you. It's not "your own man". It's a variant of "the perfect lie". You pretend you're blaming your friend while really praising him. "We called silver top at 950 but it really went to 10 before cratering so we were wrong." As Harry Browne said, "Well, if this guy considers himself wrong when he misses by just 5%, he must be incredibly accurate. I better sign up now."

Gary Rogan writes:

I have seen Woodward do it a number of times. Some may remember "the threat" to Woodward from the White House a little over a year ago after "Inarguably, Woodward has had greater access to the White House than any other journalist in town."

Kathleen Parker: The Obama White House 'threat' to Bob Woodward matters

Now Woodward is somehow sure (from the Newsmax article) that "Obama didn't intend to do something dumb… He just wanted to do the humanitarian thing and get Bergdahl released, "and then they failed to manage it."

I mean what else can it be? In the olden day the King never knew all the bad things that happened to the simple people, he was always deceived. But he always meant well.

And those who watched last Sunday's Fox's morning program saw how Woodward gently (well OK, snidely) made fun of a conservative talk show host because she just can't forget about Benghazi. What's a man to do if he has to maintain access? Or maybe this is about more than maintaining access. There is no reason to anthropomorphize these animals.

Russ Sears writes:

In track it's called "missing his seeded time". The only thing I have personally experienced that comes close to the lies traders to themselves and others is runners and their training and Personal Record. If you don't believe me talk to some fat person who has been to jogging for over a year and hasn't lost any visible weight, how their training been going.

A PR in most big races that have entry times now must be validated. Often in a race like Boston, the NCAA Track Championships or the Olympic trials, the times are so stringent that the racer often peaks before the race and then race day conditions are never as perfect as they were on PR day.

But in track, in minor races, coaches must give a "seed time" for the race officials to pick the lane and the heat that often are unverified. A seed time is suppose to be from a recent race, but rarely are they verified. The good coach will whittle his best runners times down to give him the best lane/heat. Then of course after his race, when his times are higher than seeded, "it wasn't his day".

Its unspoken but understood if he had the best time on the team, why he missed his seeded time.

George Zachar writes:

This seems like a first cousin of the "humblebrag", which is when you, usually consciously, try to get away with bragging about yourself by couching it in a phony show of humility, like "your inflatable inner-tube is way cooler than my 80-foot yacht. You get to be so much closer to the water and to nature. I envy you, I really do."
Perhaps it should be called "humblepraise".



 Running has historically suffered due to a couple reasons that makes anecdotal evidence pose as empirical science.

First running benefits stem largely from its first order damage it does to your body. It is easy to see the cause and effect of first order damage. It was only in 1980 that the women were allowed to run the marathon in the Olympics. It was thought running distance would make women infertile because it simply was too stressful.

When I started running in the early 80's the now thoroughly PC magazine Runners Times was then a underground magazine. It had an article titled something like "How to Avoid the 3 "D"s, Dogs, Doors and Doctors" sub-headed "so they will not stop you from running." ("Doors" were car doors opened while they drove by a runner on the roads shoulder)

It is much more difficult to see the second order effect, the enhancement of the bodies genuinely incredible ability to heal itself.

However, it has recently been shown that 30 minutes of aerobic exercise creates new brain cells. Aerobic exercise is the only known way an adult can create new brain cells. Hence science is beginning to understand the mechanisms for the neuroplasticity running gives a person. Often this neuroplasticity is more effective than the best drugs and counseling. Depending on your age aerobic exercise deceases your chance of Alzheimers up to 50%. Likewise your chances Parkinson is decreased only by moderate to high aerobic activity.

As for running "too much". Yes there is a limit where doing too much, no matter how healthy and young you are, were the damage simply is too great and the enhancement in the bodies healing mechanisms are overwhelmed. However, for most people, it simply is they do too much too soon. They never get to the maximum benefit, because they rush the process. But also, often this over dose is the result of "needing" to exercise to heal your mind. Your psyche thinks if some helps, more is better. During psychologically stressful times, I have had to be careful not to over do my running. For example depressed people often can find great relief from fairly high mileage, say 7 to 10 hours of running per week. But often after getting that relief they try doing double that, which is too much.

Secondly, if there is already something wrong with you, the stress of running will bring it out. Have a lingering knee injury from playing basketball? A sore back from golf, or football? Running will find that weak spot. But also starting the flu, mono, first signs of cancer, run and often you will have an early warning sign. Rather, than begin the initial cause, running can make it clear something is wrong. Anecdotally, running is the fall guy… rather than the real culprit. It is only through large statistical samples does this become clear.

Finally, for the specific cases at hand and for why pull-ups every day may help more than taking a day off, I would suggest that pull-ups are great for back and arm flexibility. A complete day off could stiffen one up and I suggest rather than no pull-ups one try a hard easy day cycle. On easy days go much slower, resting between and fewer reps. And on hard days go faster. Finally rather than focus on total done at once try doing "sets" of say 6. Or say a Ladder, 2, 4, 6, 8, 6, 4, 2.

The four minute mile was broke by doing intervals: repeat quarters, with rest in between. If the training purpose is thought to maximize your ability to heal, rather than simply run faster, get larger muscles or lift more, then letting your body learn to recuperate quickly makes much more sense.

Last but not least, what does seem to compound in a marathon, is not the time but oxygen debt….that's why its called "debt". Get in debt too quickly in a marathon an you find that the course is the longest 26.2 miles (42.2k) in the world. Larry is right the best times are negative splits. Because they did not tax themselves too much in the beginning. It is often said a person can complete a marathon, if they can run a half marathon. They do this by walking quite often the first few miles and run with little or no walking near the end.

Both these ideas, I believe, have some very direct implications to a trader. For example, stress and relax for brief periods, some "tough" days, week or months to clear the mind. Even short term traders need to have long term goals that supersede the short term payoffs.



 Forgive me if I haven't augmented the dinner party lately as one was at his 50th reunion at Harvard where I heard a great Boston Pops concert, did some bird watching at the very elegant and peaceful Mt. Auburn Cemetery, and found many of my classmates who seemed just like ordinary boys in '64 were now quite eminent and personable. About 1,000 out of 1,200 living out of 1,500 entrants were there. The joke was that if Bin Laden had been a Harvard student, the fund raising apparatus would have had his whereabout so they could solicit him. You will be hearing from me shortly.

Rocky Humbert writes: 

According to the Social Security administration, out of an all-male '64 class size of 1500 entrants, only about 1065 should still be alive.

Perhaps going to Harvard is the secret to longevity?

Russ Sears writes:

There is considerable self selection in going to college. Higher education could be thought of as an annuity ceasing upon death. SS death rates are higher than most actuarial tables, because life insurance is generally underwritten. But annuity tables have the lowest death rates due to the self selection. Incidentally the more options you have in a payout of say a pension plan or even SS, the more likely the annuitant will game the options. Where politicians often start with equivalent tables. 



"Run Strong":

Run for my Money, run
towards my fears,
Run when I’m Hungry,
run from my tears.
Run with me Honey, run
with the years.
Run for my Living, run
towards the cheers.
Run On! Run Strong!
Just for the Day.
Just for the Way.
Run On! Run Strong!
For who knows some day
the Miles may just take you away.
Run for the Feeling,
run towards the pain,
Run when I’m Dreaming,
run from my cane,
Run with the Loving,
run with the sane.
Run for the Moving,
run to victory lane.
 Run On! Run Strong!
Just for the Day.
Just for the Way.
Run On! Run Strong!
For who knows some day
the Miles may just take you away.



1) First, some thoughts on the question "what would happen if everyone lived off capital?"

If people saved, rather than spent, every dollar they earned, it would initially slow down the velocity of money. Likewise if no one ever spent savings, it would initially slow down the velocity of money. Rather than maximizing immediate consumption, people would be savers first, then very frugal consumers.

However, in both these cases the slack would be picked up in either the business sector, or the government sector, since there is now have an over supply of savers looking to invest capital. This would, of course, lower the risk, as the companies would not have to jump too high a hurdle to make interest payments. When do you think government would likewise only spend capital?

The recent financial crisis could be thought of as the opposite case where everyone thought they could leverage and overspent. This increased the risk as savers willing to lend disappeared. The money given to the flexions' banks to save them, could be thought of as printed money put in a lock box called deleveraging. Hence an increase in the quantity but a slowing of velocity of money and a risk of deflation.

2) Now for some strategies for preserving capital. The idea is to be a saver first, a consumer second.

Lets assume we invested $1,000,000 in Vanguard's index fund in April 1987. And any week we ended up with more than $1,000,000.00 we withdrew the excess. Below I list the 52 week amounts withdrawn (assuming 364 day years, 364 = 7*52). While the average $138,000 seems generous, about top 5% of earners, it would still give you many years in a row of $0 withdrawn in the 2000's. But if you think these booms and bust are systematic, then a better strategy would be to only withdraw in any one year a set amount, and save the rest for those lean $0 years. The next 2 columns shows how much you would have withdrawn if that set amount was $125000 annually. The withdrawals come from from $1 million invested in stocks excess earned, first, and then, if needed, from the amount stuffed under the mattress (not literally, of course, but previously set aside as neither consumed nor invested in stocks) . The amount invested in stock is kept at $1 million, the excess not spent in any year is mattress padding for future years.

You can see that during the bounteous years of the 1990s, you could have set aside over $1 million without compounding to cushion those upcoming lean years.

(Note: fiscal years ending in April)

Rocky Humbert writes: 

Mr. Sears' approach towards capital withdrawals is nominal, not real. So in an environment of 10% inflation and a risk free rate of 10%, he would be shrinking the real value of his corpus as he withdrew 10% on average. Conversely, in a deflationary environment, with rates at zero, he would not be consuming at all even though the corpus of his portfolio would be growing in real terms. The reality is that inflation has been averaging between 2 and 3% for the last decades and that destroys the corpus over a lifetime.

This wealth illusion associated with inflation/money printing is prevalent among both retirees and working folks. It is an insidious behavioral bias and I believe affects both consumption and economic activity. The bias is one reason that deflation is a drag on medium term growth.

Ralph Vince adds: 

I believe inevitably governments, a century or several hence, will live off of their own capital, part of a social-evolutionary process.

A structured dismantling of future liabilities (undoing the mega-Ponzi Social Security in the US, for example, in an orderly manner through generational taper with newcomers to the job market putting 100% in self-directed, those leaving the job market, 0% self-directed) and would other future liabilities to a sustainable level, and some time later, to a level of easy sustainability would allow an ultimate sinking fund of future government liabilities, eventually reaching a level of self-sustainability.

At which point, one would HOPE taxes would end, unless the Catholic Church model is employed.

Stefan Jovanovich writes: 

Everyone does live off of investment (I think this is what Russ means by "capital"). The one correlation that seems dismally robust is that, in spite of all efforts to "distribute" (sic) wealth, only the ratio of private investment to people working determines how high someone's pay can go. If there is low "capital" investment, people make very little; if there is high "capital" investment, they make much more. People instinctively know this; it is the reason we all have our eyes drawn to to displays of physical grandeur and, in the days of the gold standard, bank lobbies always had marble. But, since we live in the age of alchemy (the nominal wealth illusion the R-Man notes), "income" becomes more important than savings.

Ed Stewart writes: 

Stefan doesn't it matter how savings are deployed. Savings productively deployed in a way that increases output of goods and services increases total wealth (and if such capital is up per head, wages) but not all savings are equal in this regards. Savings deployed to fund a make-work project via government debt represents consumption. I question if in general, savings used to help another party pull forward consumption on net represents consumption and not savings, just redistributing wealth from shortsighted to farsighted — if that makes sense (??).

Russ Sears writes: 

Once again my e-mail's brevity and my poor writing causes some confusion. The "mattress" strategy was meant to be humorous, not literal. Implying you have many options as to how you use the "savings" to hedge inflation. This strategy was meant to illustrate how to take equity risk while still withdrawing a decent amount for consumption. $125000 is a decent amount in today's dollars to live off, but in 1988's dollars that was very high living, perhaps near top 1%. In the example, the amount withdrawn could easily be slowly increased for inflation, with interest earned on the savings or less savings. The bigger problem I have with my own example is what do you do if you retire/need money at the start of long term $0 return to $1,000,000 capital amount. But let us go over some inflation options:

1. Put savings back into equities…I believe, (only my opinion), this may be a good option if money keeps being put into the system due to low or negative inflation and hence likely low interest rates as we currently see. But, this also leaves you more open to risk of inflation killing the equity markets or long term bear markets in general. However, looking back long term equities returns should beat inflation if next 100 years is like last 100 years.

2. Put saved money into a long term bond fund. This could handle mild inflation, as long as it stays mild.

3. Put money initially into short term fund then as inflation gets "high" switch over to long term bond fund as inflation kicks up. But this leads to when is inflation "high" (10% seems to be Rocky's boggy). Perhaps the answer is when it starts killing equities returns because the market is worried about it. Then if you think this is the case start putting "more" of the savings into long term funds. You'll have to decide what "more" speed is and if inflation is "the cause" for poor equity returns.

4. A combination strategy.

How to invest for inflation is a tough subject which such a simple "living off capital" strategy was not meant to answer. I hope the above shows sufficiently that a disciple approach to withdrawals. even if adjust for some inflation is better than simply going with the wealth effect and spending as earned from equities. But in the end you are going to have to decide for yourself, what you think inflation will do and when it will do it. And then execute it. But at least a disciplined approach to withdrawals give you much more flexibility and with it a chance to meet this challenge.

Finally the reason "capital" was chosen instead of "investment" was to signify an investment that is somewhat dependent on a stable "monetary" base for entry and exit. As opposed to a more direct investment in human capital or even property which may out last a government and may more likely be inverse related to inflation.



 My Mother was an identical twin. Twins often one right and one left handed, and have other differences in thinking. But also one also gets more nutrients in the womb and one is more healthy than the other. I could always identify my Mom in her childhood pictures as the frailer looking one. She died of kidney cancer at 57 and my Aunt is very healthy at 73.

On a lighter note, while Billy may be right that : "Only the good die young". The contrapositive to this, I remind those that dismiss exercise, is: "Only those that died old lived badly". It is not all about the age.

Aerobic exercise is the one proven way to grow brain cells. The new cells can strengthen the neuroplasticity of the brain. This helps the "old" keep learning new ways to think, keeps the brain forever 21.

Carder Dimitroff writes: 

I just returned from my nth trip to visit and help my dad. He is living in a gold-plated senior community with lots of amenities and support staff. Previously, my mother-in-law lived in a similar community.

My stays with my dad are usually 3 or 4 days. He does not want to rush and he has a long list of "must-do's." Altogether, I've spent about 30 or 40 days living on the campus.

I know other list members have had similar experiences. Without personally witnessing the daily life of a senior, nobody could possibly understand the hopes, fears, challenges and life of the nation's elderly.

Let me share some observations. Others may want to comment, so feel free to offer your thoughts.

1. Diet: Most, like my dad are thin. Few are overweight. I saw no one critically obese. While plenty of great food is offered, I suspect many are skipping meals.

2. Exercise: The facility offers a fully staffed and modern gym. They also have outdoor facilities. They are rarely used. Most seniors need core and upper body strength to transfer. They don't see new exercise regimens as an opportunity to restore or maintain their health. Nobody runs.

3. Sunshine: Spend a few hours a week outside and one or two pills can be eliminated.

4. Medicare: Leave it alone. Yes, these are all wealthy people. Most are self-made. Nevertheless, they all believe Medicare is something they earned.

5. Medical care: Left to their own devices, they are not big consumers of medical care. Their attitude is: "If it ain't broke don't fix it, if it is broke, don't tell anyone." Their biggest fear is the facility's medical center (a separate skilled nursing facility). Most will hide medical issues fearing they will be forced into the [gold-plated] medical center.

6. The end: While good health is a requirement for admissions, many realize this is it. They know this is their last stop. It is a sobering thought (even for me). They also know they are no longer significant contributors to society, particularly these residents who are largely hidden from public view.

This is our fifth family member to take this trip. I've concluded the best option is to eat nutritious foods, exercise and get out. Like James Fixx, I want to live well until the end.

Sam Marx writes: 

I am up there in age and would easily fit into one of these seniors communities. I trade stocks and especially options. Financially I'm very succesful. I feel that trading, especially options, has kept me mentally alert and healthy. 

I pay a lot in taxes, it seems more every year, so I guess I would be judged still as contributing to society, whatever that means. 

I live in a gated community in Florida, and the younger residents are always asking me for financial and trading advice. 

A colleague who taught at college with me never trading and seems to be mentally regressing. The "youngsters" don't care for his opinions or to discuss anything with him.

For those of you that trade, don't fear old age. Active trading contributes to mental health and alertness.



 Sports are selling a dream to the kids of one day making it.

People watch sports because we mirror the players' motions in our heads. People imagine they did what the stars did, despite the impossibility of it. But you throw drugs into it and most will reject the idea that they mirror substance abuse. You put drugs into it and it is like finding out the secret ingredient to your favorite restaurant is small dose of poison or that their bakery is rat infested and did not pass the health inspection. It has to be dealt with harshly once exposed, or it is like a player shaving points for the bookies, it can and will destroy the brand.

Body building was still a sport when Arnold did it because it was not known they all took roids. Now it is like pro wrestling, a freak show. Nobody want their kids to become a bodybuilder, except bodybuilders. Finally, it is cheating, nothing to be admired, anymore than messing with accounting to get your bonus while ruining the company. If you had lost money to a drug cheat, it is easier to comprehend. For runners EPO is like playing Russian roulette. Your heart can literally explode, as you dehydrate. Now this is like World com executive cheating and knowing that it could destroy them in the process. Or a Ponzi scheme, wanting the good life at least while it last, despite the misallocation and destruction of wealth that goes well beyond their millions.

Craig Mee writes: 

That's true, Russell, excellent points. What I'm thinking is that sports may in fact drive advances in clean drug and herb technology that benefits the human body more than it wrecks it, or advances other sciences where they need to push limits like space travel. I, too, worry about the children. I wonder what will happen to trying to improve your performance and competition–the very nature of sports. But hopefully what started out a bit dark may lead to good things. 

Chris Cooper writes: 

There already is plenty of overlap between drugs that make you healthier (when taken in moderate doses) and drugs that improve performance. Look at the list of drugs taken by Lance Armstrong, for example: testosterone, hGH, EPO. All of them make you healthier when used moderately. But elite athletes have the motivation to increase dosages to potentially unsafe levels, which is where concerns about safety spring from. I have no problem with the use of PEDs, but I abhor the lying and cheating that normally accompanies it.



 If you are the trader getting squeezed and know it then you don't have to liquidate the threatened positions. What you do is rank the most liquid correlated positions and especially the liquid OTM options of correlated and liquid items and let the predator activity enrich you.

I'd like to see your answer on this plan about cutting the slippage and hopefully doing it near the point where they think they've got you and you can exercise options to hit back.

It's a military type tactic that suckers the predators into a trap. If one can slice and dice orders anonymously without a bank holding all the cards, one might make it work.

The trader getting squeezed has perfect information on the vulnerable positions and goes to the electronic and somewhat anonymous options markets to buy cheap OTM volatility explosion options in all liquid and related assets to soften the blow. Let's see the predators game the algo slicing and dicing of hedges while inflicting what they think is pain. They should pay off the victim of such a squeeze 2:1 at a minimum.

Victor Niederhoffer writes:

What do you people think of this? For reasons of loathing, and avoidance of squeezes, I have avoided any study or consideration of options for many years. 

Russ Sears writes: 

It seems much of the hedge cost is tied up in matching an exact date and risk of sudden jumps across the strike as that date approaches. From my experience hedging variety of equity indexed annuities (S&P indexed call options embedded in an deferred annuity). I believe the secret to not getting squeezed is to manage the gamma position under "normal" conditions by writing shorter dated options an buying slightly longer time positions. And manage the delta exposure by the different strikes. If you are long gamma you maybe shorter delta than you want after a big drop, this can be carefully reversed (sell long dated, buy shorter options) as volatility spikes.

While not endorsing the derivative expert's new book "antifragiles" (he is too long winded), I would recommend only reading the prologue. It is like exercising, if you practice hard the first order effect is to tear down. The second order is to recover. So you go long the healing process under healthy times to prepare for age and diseases. People dread the first order pain too much so they don't exercise and buy out of the money expensive puts.

What the expert misses is not only do you stress yourself to increase your ability to recover, you indulge your self after the stress, sleep, food and ice baths etc. if inflammation is too much. In the book he says he is on a fast of some kind almost always. But he also lifts weights walks and exercises. This is not healthy. It is as much about the recovery as it is accepting some first order pain.



 It is true Enron's management was engaged in a series of bad decisions. It is also true Enron offered major contributions to the energy industry. Their biggest contribution was to introduce power markets to the electric utility industry.

Because of Enron, control of the nation's transmission lines was wrestled away from utility engineers and put into the hands of traders and bankers. Physical transactions were replaced with financial transactions. Free options to use assets were monetized and priced in open markets.

One example is firm transmission rights (FTRs). Before Enron, owners gave away rights to use transmission lines to a trusted few. Now, FTRs are auctioned in open markets, where users bid for the right to use utility assets.

Because of Enron, Regional Transmission Organizations (RTO's) gained significance. RTOs are what many believe is the "nation's grid." The truth is North America has many unconnected grids, ten of which are open markets in the form of RTOs (most of the nation's population centers are located in one of those RTOs). Every day, RTOs conduct a series of open auctions for energy. They also conduct other auctions for capacity, FTRs and related products and services.

Enron helped transform a highly regulated government-controlled industry into a loosely regulated market-based industry. Enron went bankrupt before the transformation was complete. Initially, only the Northeastern states and California jumped into market-based power. Later Midwestern states, Texas and some Southwestern states joined in. But to this day, many Southern states shun power markets, preferring instead a government-controlled regulatory scheme.

It is true that Enron tried to corner the very market they created. It is also true that the financial techniques they introduced were new in the energy industry, they were borrowed from Wall Street, they were transformative, they were sometimes unfair and most were legal at the time.

Today, RTO's operate under Federal Energy Regulatory Commission rules. Those rules include valuable lessons learned from Enron and other actors. They continue to evolve.

On balance, Enron was a positive force for free markets. They were also a negative force for fair markets.

Russ Sears writes: 

 Enron is a good example of what can happen when a company/species goes from a survival of the first strategy into a survival of the fittest as their niche draws competition and does not survive the process. Normally, growth and high profit margins are a sign of strength, but the temptation as the niche gets crowded is to eat the young to support the current generation of leaders so they can grow and have the high profits they were brought up to believe was their birthright. A similar thing happened in the mortgage backed markets.

These are the times that test collaboration and integrity. It is easy to be honest in passing out the pot when it keeps growing fast and furious. I believe Apple may be a case where it survives through a good collaborative environment within. Time will tell. Given Jobs' reputation of being a dictator and his temper, would this have been the case if he was still running things once continued growth became limited? 

David Lillienfeld comments: 

The issue with Jobs isn't what he would have done. It's whether the management team he left leads the company to continued prosperity. It isn't yet clear that they are so doing, but I'll give them another year to show one way or another.

Managements have two responsibilities–place the right people in their jobs and to provide for an orderly succession that allows the company to continue and hopefully better its lot. (Bettering its lot means ultimately bettering the lot of its shareholders.)

The book on Jobs as CEO isn't yet concluded. Many suggest that he was the greatest CEO of all time. I'm not ready to subscribe to that notion–not until his successors provide some demonstration that the company is not adversely impacted by his departure–no man being indispensable (that great Churchill comment about the cemeteries of Europe being filled with supposedly indispensable men). From my limited perspective, I think the title of the greatest CEO remains a tie between Alfred P. Sloan and John D. Rockefeller. One can argue about what they did, but its hard to argue with the results–both during their tenure and afterwards. J. P. Morgan, too. I suppose one could put George Washington in that league too, but I'll defer to others on this list who can speak to that idea–pro or con–better than I can.

Jobs was an SOB, but the man performed. So was Bob "get rid of the olives" Crandall. And Henry Frick. They all performed, they were all considered magnificent CEOs. The latter two hardly qualify as among the greatest CEOs, and the book is still out on the former.



 I have been considering whether there is any evidence that socially responsible businesses are better investments than profit maximizing ones. Most of the research points out that it is hard to define profit maximization because short term and long term maximum paths might differ. The concept of risk and return is also relevant with higher return often decreasing the chances of surviving. The duty of a company and its directors to its shareholders, and their incentive to do better for themselves and their shareholders by increasing earnings also plays a part. The concept of dead weight cost is also relevant which is minimized when marginal cost equals marginal revenue and the pricing is such that the demand curve intersects the supply curve at the profit maximizing price. I found this article on going for fourth downs refreshing and provocative in this area.

Rocky Humbert writes: 

I think this is an important subject to consider and the current academic literature does a comparatively poor job. For starters, there is no satisfactory definition nor rubrics of "socially responsible businesses." The monikers of "sustainability" and "green" and "sensitive to communities" are difficult to quantify to say the least. And frustrating to understand in many cases. A chemical plant that dumps its toxic waste into the backyard (while poisoning its workers and neighbors) is?? clearly maximizing short term profits at the expense of long term profits. And it's clearly socially irresponsible. And it will eventually fail. In contrast, my office landlord just installed infrared soap and hand towel dispensers in the bathrooms (presumably to be green), but will they have a good ROE on this? I have no idea. Will they attract new tenants because this is a "green" building? If the rent is the same, I suspect yes because some # of customers get incremental utility from transacting with socially responsible businesses. In contrast, no one (reasonably) gets incremental utility from transacting with socially irresponsible businesses.

The "duty of a company and its directors to its shareholders" is a decidedly American concept. The reality is that torts and taxes and regulation mean that the actual implementation of this duty may in fact include social responsibility. Things have changed over the past 100 years (for better or for worse). So — the answer to the chair's question must be: if the cost of being socially responsible is small, then socially responsible businesses MUST BE better investments. If the cost of being socially responsible is large, then it's less clear — and there is the free-rider problem.

Rishi Singh writes: 

I had the benefit of hearing the current owners of the Empire State building give a talk on going green and increasing revenue a few years back. Their synopsis was that going green for the sake of going green was too expensive for the marginal benefit (e.g. solar panels). Instead, by gutting office space, adding insulation, different windows, and light sensors to turn off lights, they improved the quality of the offices and significantly reduced utility costs at a reasonable cost. By adding these features they could charge higher rent while also improving their green footprint and returning to profitability. An example of market forces awarding the cheapest implementation of reduced energy usage.

Susan Niederhoffer writes:

Some thoughts:

1. His point about short term vs. long term is very important … because long term you see/pay for your short term decisions. Conscious Capitalism companies are long term focused. We have used as proxy for good companies, 100 best companies to work for, or some other third party list.

2. Your heading reveals a trade-off mentality, that it's either or. That's not what we've found. It's possible to keep looking for solutions that make ALL stakeholders better off (and most CC companies include the earth as a stakeholder to avoid those nasty externalities). Even if it costs in the short run, doing the right thing will pay off over time. Patagonia is a good example.

3. CSR is often the crony capitalist trying to tack on a beneficial marketing strategy to get on the green bandwagon (his landlord). You have to dig deeper to sort out which companies really mean it.

4. Transparency is getting harder to avoid. Companies that delay finding out about the negative impact they have in their supply chains and fixing them will pay when their customers discover and put it on twitter. Brand loyalty is hard to buy.

5. You will have fun debating these with John at Junto. Keep up the research…but better read the book too.

Russ Sears comments: 

The problem also is there are many "socially responsible" businesses that are not to be believed. The customer wants to do business with a business that is on the loyal side of the prisoners dilemma. It signals that they value repeat business, and this one transaction will not be be maximized at the customer's expense. In other words, a properly designed social response shows that the business considers itself to be in an infinite set of transactions. It will take less now so that the great great grand kids can make up for the small cut they give back to society. Like Zacheus the tax collector, if they miscalculated and took more than their share, they will return it 4 X what they took.

The problem however, is that often a social responsible business is really doing a slay of hands. Like Capone gifts to the Opera, or LiveStrong gift to healthy living.

Also sincerity is terrible difficult to measure, but it's something many individuals think they are better at than they are. Like ants, they are to be trusted because they give off the scent that they are from the same "tribe".



 In reading Scorecasting, well reviewed and recommended by the chair, I came across a point that hits home when looking for statistical causal relationships. When x variable appears to be related to y variable, it is very possible that an undiscovered variable z has a much larger effect, perhaps on both variables. There are examples of this in the book, mostly thoroughly explained in the home field advantage. This is empirically shown to be true across, time, cultures and sports, running at an advantage of 55% to 70% in favor of the home team. Controlling for other things, crowd size does correlate very highly with the home team advantage. But changes is crowd size are shown to have no effect on players performance. Rather crowd size influences officials, but it is secondary affect. The primary affect is officials themselves who have a in bias (most likely unknown to themselves prior to this book) to favor home teams regardless of the fans. Crowd size amplifies or dims this already existing bias. Had the authors not researched deeper this point would have been lost.

Pitt T. Maner III writes: 

It is interesting that there are sites that keep statistics on the refs now too.

The held ball call near the end of the Louisville-Wichita St. Final 4 game by Karl Hess appeared particularly bad but you wonder what the factors and influences are that might have led to it. The game finish would have been much more enjoyable if the Shockers had had at least one last attempt at a 3-pointer to tie the game.

Was it the nearby presence of the Louisville coach Rick Pitino? An ego issue where the ref felt the need to decide the contest? Crowd influence? TV audience thoughts? Subconscious need to end the game and prevent possibility of overtime (desire to get off the court,)? Something a player said (need to payback for perceived questioning of previous call)? A whistle blown by mistake in a hurry with no means to take back (I never make a bad call in an important contest). Lots of possibilities.

Russ Sears writes: 

When watching a game, I have often thought that the bias in the ref could be spotted by whether or not they avenge a bad or close call on one side by giving the next close call to the opposing team. After a moment of reflection, the ref probably realizes he blew the whistle too soon or did not blow the whistle when he should have. However, it appears to me that the avenged even handed blown calls are often one sided. Yet when watching a game, my own biases would prevent me from "counting" this fair.

Perhaps the broadcasters in a national game could be counted on, but it appears to me they have a vested interest to give the losing team something to complain about. If I recall correctly, the tie-up was initially called a great defensive play by Louisville, but then changed to blown call.



 I admitted I was powerless over my affliction to taking small profits.

I made a decision to turn myself over to the care of those who affably might help me as God has helped others.

I made a searching inventory of all the losses I have taken.

I admitted to other human beings especially the spec list the nature of my wrongs.

I am ready and willing, but perhaps not able, to remove these defects.

I humbly ask all my supporters and friends to help me remove them.

I have enumerated the many millions that I have lost and beg forgiveness from those I could have helped had I not had this affliction. My family would be a very wealthy family and would not have to worry about such things as homes and educating their kids had I not succumbed.

I promise that I will make amends to them except when doing so might lead me closer to the grave and a nondescript and economical old age home.

I will continue to take an inventory of my lost profits and exacerbated losses, and when I transgress I will admit it. Readily.

When I jog, and have a peaceful moment, I will meditate on my past transgressions.

I will share the awakening of my profits, if any, with my colleagues so that others afflicted with this ailment can practice the principles necessary to correct.

And I will count. If this affliction manifests itself in day of week effects, than when the two day move is down seriously and the one day move is up, there should be a rise the next periods. I find of the 152 most similar events in the new millennium, the average decline the next days is -0.05 %. When the two day move is up seriously but the one day move is down, there should be a decline. I find the average move the next day of 132 such events is 0.03 %. I find similar random results for intra day manifestations of this terrible affliction. So I will meditate and count some more. 

Russ Sears writes:

An integral part of the 12 steps is accountability. You don't slip off the wagon because you don't want to have to admit it to the group and your accountability partner. Further, you recognize the triggers and you call the accountability partner to talk you down from the ledge.

In October in Canada, I attended an Enterprise Risk Management Conference where several heads of large Risk Management Departments talked to the group. It appears the regulators have adopted a system of 3 level of "challenges". That is they document times risk rules were broken and mistakes were made, either unintentionally or by bad processes at 3 different levels.

The first level was self or departmental reporting. The second level was outside department but internal to company (either internal controls or internal customers) and the 3rd level was external auditors. Each level was expected to have some "challenges" and write up how to improve them, and give a degree to how material or risky the error was. The right number of challenges and the degree of rogue risk was determined. Too little challenges or no serious violations were considered not taking risk management seriously.

The problem is, however, that this only prevents errors or rogue risk happening at the lower levels because it is a top down approach. But most companies fail because of strategic risk. Often in hindsight it is clear the strategy was guaranteed to make money short term in exchange for taking on crippling unavoidable long term risk.

This became clear to me when the Citi Risk Manager talked…The preamble to the "dance while the music is playing" quote played in my head.

They knew the housing market was a bubble ready to burst… But they also knew there was massive bonuses to be made before it struck and destroyed most of their company's equity.Nobody at the lower level was allowed to "challenge" their strategy, no matter how clear the fraud was to these lower level people.

In short, there are some risk rules that should never be broken, no matter how high you get. These may change as the circumstances dictate but they should always be defined. Allowing everyone to hold you accountable should be part of the any trader's 12 steps.

Chris Tucker adds: 

Is there a twelve step program for traders that habitually get out too soon?

(20 minutes to close): "Daddy will you play with me?"

"Umm, give me a couple minutes honey" says he. "Let me sell this first."

He groans but dutifully closes all positions. "What are you selling?" He makes a half-hearted attempt at explanation. Then heads outside for frisbee and badminton.

Then comes in an hour later and berates himself in disgust.

He never called his sponsor so there was no one there to say "Just hold it 'til the close bud, you can do it!"

He makes dinner all the while promising that he'll do better tomorrow. That he'll call his sponsor. That he'll keep at least one contract open, even if it kills him.

And he wonders, deep down, if he really can. Or is it going to go on like this forever.

Rocky Humbert writes: 

Mr. Tucker's whimsy is actually a profound question which is not easy tested:

Over a trading career, which is better: Exiting too early or exiting too late? Over a trading career, which is better: Buying too early or buying too late? (for a long only investor)

I would argue that for most fundamentally-oriented investors, the true killer is buying too early. I believe there are mathematical underpinnings to this. Perhaps other have a rigorous analysis of this problem. I've never seen this debated on the Dailyspec.

Ralph Vince writes: 

I think it depends on how you size your way in. I find I am infinitely better to be too early — on exits as well as entries. But I scale in, gingerly, one toe into the kiddie pool at a time. But this is, essentially, entering and entering on limit orders, whereas to be late at both ends, is essentially entering and exiting on stops.

I'm very interested in your thought process as to why that would be more advantageous.



 As was discussed pretty well on this site last summer, the US corn crop last year was hardly bountiful, courtesy of a drought. In Texas, the drought resulted in the base of many lakes being visible as sheets of dried/drying mud, with piers off in the sky above. I assume that the rattlesnakes didn't fare too well either, but as a severe herptophobe, I won't get into that.

It appears that the drought is here to stay for a spell. At some point, even the CPI will record the resulting increase in grain prices.

Russ Sears writes:

While reading about a drought is interesting from a historical perspective, it is a sure way to trade yourself into the poor house. If yesterday's weather is not already built into the grain markets; then the thousands of farmers who experience it and for years have bet the families bread, do not know what they are doing and should pack up and move to town and find work in auto repair, factory work or construction where they can still work with their hands but predicting the future is not part of the job. The joke on the farm is that these articles always start popping up when the local sail boat lake is once again in business and the next 4 days call for 3 inches of rain… as it is here in OK.



 In the classic romantic comedy "His Girl Friday" the major plot is how Cary Grant wins the girl and keeps his best reporter from marrying. But the comedic subplot is how pseudo science gets sold to the public by throwing in key phrases so that public thinks they are more sophisticated than they really are. Not only are they up to date on current events, they understand the great social science and political thought behind it.

The newspaper wins by appearing on the cutting edge. The politicians aligned with the social scientists win since their theory is pumped. The public, though duped, wins by raising their self esteem. But in the days when women could be the comedic folio, to achieve this, the facts must be made to fit the theory, and it is only the reporter and her editor that are in on the joke.

A simple mathematician wonders how "eigenvectors" overcome the placebo effect of pseudo sophistication of wine tasting. And the mostly tea drinker in me asks the emperor's clothes buyer, "Is not the fun in the adventure of the trip, not the destination?"



As the S&P approaches its all time high, slowly but steadily, one ponders the implications as it appears to be pre-ordained with the slow but consistent rise occurring.

It is well known that the markets' volatility are auto-correlated when the jump in prices occur quickly. But if the large change in price is slow but steady such as we've seen last few weeks, does volatility increase? Does this signal reverse trends are more likely than normal? Of course this needs to be defined better, yet, I wonder if someone knows the answer(s) from previous studies?

Rocky Humbert writes: 

Russ: There are multiple answers to your question.

1. Firstly, you have to differentiate between the VIX (which is based on a "market" estimate of future volatility using live options prices) versus the actual realized volatility. It is theoretically possible — in fact, quite likely — that the VIX can diverge from actual market volatility for long periods of time. Right now, the VIX is about 11.5% and the November 2013 VIX future is 18.90. So right there, you see the market has priced in a higher VIX. Assuming that this market is efficiently arbitraged, it means that 8 month options are much more expensive than 1 month options. There is some path dependency here, but in a nut shell, it means the answer to your question is no, eh yes. (That is, Mr. Market believes the answer to your question is yes in the longer term, but no in the shorter term.)

2. Secondly, the definition of volatility is simply the standard deviation of returns. As a silly example, imagine if the S&P went up by 5% EVERY SINGLE DAY. In this absurd example, the VIX is extremely low (even though the market is going bonkers), since it's a monotonically increasing value and the change in returns every day is 0. (That is, so long as the velocity of the market is constant, there is NO volatility.) In this silly example, I would expect the spot vix to collapse (due to arbitrage) but the long term vix futures would explode. (It's important to not forget how the VIX is calculated.) Similarly, if the S&P were declining by 5% EVERY SINGLE DAY, the VIX would also collapse. Again, a stupid example. But the math doesn't lie. Of course, the historical behavior of markets is that things don't move in a straight line. But for any given period of time, markets can and do move in a straight line.

So to answer your question precisely, "if a large change in price is slow but steady does volatility increase?" one must note how the calculation is made– and one must further appreciate that monotonically increasing or decreasing markets are the very definition of low volatility. The short answer therefore is "NO".

All of this begs for (and rationalizes) why as someone who sees very little value in the S&P, I am still making some nice returns by owning short dated call options (and I periodically roll up my strike prices.) This strategy will work until it doesn't. But it's already worked long enough to justify the simplistic assumptions underlying it — which is that I neither want to be the greater fool nor the lesser fool. Just a profitable old fool who plays the hand that I'm dealt. Not the hand which I wish I was dealt. Nor the hand that will be dealt tomorrow.This period will undoubtedly end with fireworks and tears. But when and from where? That NO ONE knows. Keep things stupid and simple….



 Sorry for the link but I found this article fascinating and worthy of the share…

"What Should We Be Worried About"

Chinese Eugenics

China has been running the world's largest and most successful eugenics program for more than thirty years, driving China's ever-faster rise as the global superpower. I worry that this poses some existential threat to Western civilization. Yet the most likely result is that America and Europe linger around a few hundred more years as also-rans on the world-historical stage, nursing our anti-hereditarian political correctness to the bitter end.

David Lilienfeld comments:

Four thoughts on reading this piece:

1. Every time someone tries to selectively breed a population, you get lots of unexpected diseases showing up. Sometimes, those diseases affect only a small segment of the target population. Other times, a larger segment. I doubt that this effort will be any different in result–and it may result in a higher rate than the Chinese are prepared to accept. Imagine, for example, that the process results in 5% of the target population having an accelerated version of dementia, perhaps starting in the early teens–before these individuals have much ability to use their IQs to advantage (contributing to the society). The costs of care will challenge China in ways it hadn't anticipated, particularly given the population implosion already in place. Moreover, one doesn't know if these alleles code for a protein, serve a regulatory function, or both. Taking the alleles out of the genome could, potentially, interrupt their ability to function in the manner expected. So I don't think it's necessarily "game over".

2. Malcolm Gladwell noted in Outliers the value given in East Asian societies to patience, something lacking profoundly in Western societies these days. However, if one starts to breed a specific genome, do those individuals have the same willingness for patience? I don't think that we know that this advantage in East Asia is simply cultural. There's also the need for innovation. East Asian societies do well in innovations in quantitative areas, but translating that strength to the consumer/business arena hasn't been so straightforward. Until there's a demonstration of consistent innovation from those societies, this will be a question mark. Now, how long before such innovation becomes visible? I have no clue. Perhaps this activity is already present and I've just missed it (in which case I'm sure those on this list won't hesitate to provide some education of the fact).

3. There's a related issue: the social dimension. What sort of society results from such breeding? I'm reminded of the Foundation trilogy–the First Foundation engages in all manner of production advances–lots of innovation, etc. There's rumored to be a Second Foundation, but it's not really clear what that entity is all about, or even if it exists. (Spoiler alert): It's the Second Foundation, with its sociological orientation that comes into play and addresses the sociological and related problems resulting from the First Foundation's success. (The trilogy makes for short reading, and it's some of Asimov's best science fiction.)

4. The sociological dimension isn't a minor one in China. Chinese sociology isn't one of the country's strengths, and I think that's part of the reason Chinese epidemiology is weak. Even if this area becomes a focus of development by the Chinese government, it seems unlikely to change for at least one generation, more likely two or three. The nature of sociology works against efforts to speed up capacity and capability in it. I suppose one could let any social changes occur and deal with them piecemeal (as we have with our drug problem–locking up 2-3% of the population), but I don't know that that would be acceptable in such a new society. I'm speculating, though.

Just some initial thoughts. It is provocative, I agree.

Russ Sears writes:

The reason eugenics does not work on humans is simple. They are using the wrong evolutionary strategy for our species. We are not a survival of the fittest species. We are a "Survival of the First" species. We have dominated a vast new land called abstract thought. Further, we are a species of super cooperators when the cooperation is through mutual respect and trade-offs we exponentially increase each others wealth. Putting this together we, have captured vast new resources of wealth.

If you want a superior more competitive people you do not measure by the conformist standard of the "greatest" in XY or Z. Even if X, Y, and Z are abstract thoughts, it is not NEW abstract thought, it is standardized testable conformist abstract thought. You measure in how much risk they willing to take, how much they want to be the "first", how they want to try new things, how they look at failure not as a step back, but one less step to the right path and how much they value Liberty and unsupervised willingness to risk failure for the chance at great success. You give yourself a group of people willing to risk losing everything for a fresh new start, because they believe working together, they have what it takes to create a new world for themselves. You breed those entrepreneurs with those who love entrepreneurs. Then you have people that create new wealth, because they did not do what they were told. They had a dream and saw a vast new land in being the first in this new niche area. Once the path to this vast new wealth are clear, then many people will willingly follow. If you want to live where leaders believe they earned their authority by superior skills, NOT correct risk taking, then you will find a world where the leaders are those best at tearing everyone down, do not value diverse thinking from their expertise and taking from those that took correct risk to create the wealth.



"Introducing the Crony Capitalist Index"

Russ Sears adds:

One of the big lessons from the crisis was how correlated those in crony capitalism can be. Because the deception and corruption runs deep within all those in the same crony businesses.

AAA and highly rated corporations meant little. Their conjoined downfall was never within the realm of possibilities in all the models.It is interesting that those that did best were those able to see the fraud within or at least the log in their neighbors eye: versus those that, to the end thought their prior outperforming was due to their own brilliance and not undetected fraud and deception.

anonymous writes:

As high as is the ROI on crony capitalism (and I'm sure it's VERY high), it's probably even higher in other avenues of endeavor, such as for unions. Payoffs to unions under the current Administration have been phenomenal. It was also very high during the 1930s.



The professor once performed a beautiful study to see if all the turning points that one could retrospectively select

to be short and long a la birinyi who shows almost 5 times the market drift by getting in and out of the bear and bull markets with 20% being a fuzzy base line , —– and he found it completely consistent with randomness. It was a model of what a good study should be. Perhaps he will share it with us again, or at least tell us the drift. 

Richard Owen writes: 

That would be great to see. It is definitely one of the most mumbocentrically diverse areas of asset analysis and a firm and incestuous friend of the buy and hold debate. The more important corollary to the depressing corollary would therefore be that successful investing is almost entirely about the quality of your liabilities? Would a Japanese salaryman wealth manager with the Professor's report in hand have been able to maintain a career? If not, would he have been right to get a copy of Taleb out to console himself?

Charles "the professor" Pennington writes: 

I have kind of forgotten how that went, but I will see if I can find it.

There was a study of something kind of along those lines from Big Al and/or Kim Zussman not so long ago that was very compelling, covering dozens of possible trading strategies, but only one or two could thread the needle and do better than random.

Russ Sears writes: 

Not as rigorous as the Professor's, but I did a back of envelope study of the Dow from 1900 to 12/31/2012. Not including dividends, just the index.

There were 20 beginning of the years where the Dow was less than it began 10 years (of course these have overlapping decades).

What do do if you retrospectively find yourself in a "Secular Bear Market"?

The next year change in the dow average +14.35% min - 23.5% max 59.6% stdev of 21.1%. Whereas the overall was 4.7% and stdev of 20.9%.

Likewise the next ten years change based on roughly 20% steps of prior 10 years (again overlap) This only covered 1910 to year end 2012 since I needed 10 year periods before and after. There were 2 years 2008 and 2009 that the decade prior was negative, both had positive next years. But we do not know what it will be in 2018 and 2019 so they were not included. Here the overlap does matter since the next 10 year periods are not independent. 

Count  group avg Range for Group    Next 10 years  Range for group 

19     -16.8%     -49.7%       1.4%     108.5%      -3.6%     271.7%
19      16.9%       2.0%      33.0%      82.0%     -39.0%     238.8%
19      60.2%      35.4%      98.1%      95.8%     -15.1%     240.1%
19     137.9%      98.5%     169.4%      75.2%     -39.8%     323.4%
18     240.9%     172.7%     323.4%      96.8%     -49.7%     317.6%

Richard Owen writes: 

Very kind and thoughtful work! Apologies to be very dumb: what periods do the five groupings of 19 counts represent? And group avg [col 2] (I would have thought trailing? But the premise is those periods were negative?) The "excluding divs" heuristic so common for stock analysis is, I guess, one reason why we need King Dimson so badly.

Russ Sears writes: 

The period in the five groupings in the next decade. Hence, may double, triple or more count some years. It takes some time for the "past decade" to move into another grouping.

A Warning that Engendered the Discussion from Victor Niederhoffer: 

Please don't write more as you have threatened about "secular bull markets" or "secular bear markets" that can only be described in retrospect and have no predictive significance, and are mumbo jumbo and depend on random selected starting and ending points and would only lead our fine readers to wallow in absurd, unhelpful charlatanism.



 I suspect that Lance Armstrong's confession on TV had to do with last Thursday's deadline for the US Federal Government to file a Qui-Tam (whistleblower lawsuit) action against him, based on information revealed by Floyd Landis (another doping Tour de France winner who denied doping for years after testing positive).

Qui-Tam lawsuits reportedly date back to the war between the North and South of the US, when the US Federal Government (North) offered a 10% share of money recovered from anyone who squealed on anyone defrauding the government. All the whistleblower has to do is talk, and the feds have a certain time to decide to pursue the case or drop it. If they pursue it, their likelihood of winning is very high, as they have infinite resources and many other advantages, such as the courtroom procedure where they plead their case, then the defendant rebuts, but then instead of the decision being made, the feds get another chance to rebut. This and other advantages, combined with the threat of criminal prosecution, lead many defendants to give up. In Lance's case, I suspect it could cost him more than all the money he has, or would likely be left with after the other people expected to get money from him get what is coming to them.

Press articles while he was still denying doping were in two categories - the ones that mentioned that he had tested positive for doping, and those that did not. He tested positive for steroids in I think his first Tour de France, and afterword produced a doctor's letter saying he had been taking a prescription saddle sore cream containing steroids. A doctor's note after a positive test is no defense, and the rules are clear on that - and printed on the back of every racer's license. But, he was let off the hook because he was a big shot by then, and it was not in the interest of anyone involved with the sport, including sponsors, to have him banned. Much later six of his blood samples tested positive for synthetic EPO.

EPO is a chemical produced naturally in the human body, which stimulates production of red blood cells. The fake stuff does the same thing, and was at one time the most commonly prescribed drug in the world. For an athlete, extra red blood cells mean increased Oxygen carrying capacity, which means riding a bicycle up a mountain without getting out of breath. And in training it means stressing the muscles all that much more than a person with normal aerobic capacity could do.

 There are a least four ways to increase red blood cell count, two of which are legal in bike racing, two of which are not. The two legal ones are training at a high altitude, and sleeping in a tent at night with reduced Oxygen levels, both of which champions have done. The two illegal ways are taking synthetic EPO and blood doping, which is removing a pint of blood a month before a race, refrigerating the blood, and then putting it back in the night before the race, leaving the body with extra red blood cells.

In the early 2000s there was no test for synthetic EPO, but a few years ago, when the test came out, samples of Lance Armstrong's blood which was taken in early tours and kept frozen over the years was tested, and all six samples came up positive. That makes 7 positive tests that were widely known to the public during his years of denial. The rest is history.

-Henry Gifford (Former NY State champion bike racer who has never taken any drugs or drank any alcohol).

Russ Sears writes: 

People could forgive the drugs and cheating, but they will not forgive the bullying and using LiveStrong as a front to further this bullying.

I have seen it more than once, when a rational guy starts taking steroids he starts having a g_d complex.

With the new sudden success, and the mangled brain, it leaves him thinking they are above justice, everyone else is blind. The changes seems so obvious to him that he is on juice. The accolades so addicting.

The justification that everyone else is doing it and getting away with it convinces him that fate has singled him out for greatness and he cannot be stopped. He is the only one capable of understanding the truth.

This was true from the kids on each stage level from the c level HS basketball team to the Olympians winning medals. It was sad and pathetic seeing the HS coach confront a juicer, it was an epic tragedy at the elite levels.

Ralph Vince adds: 

Reading Russell's post made me think "Does he mean Armstrong… or Obama?"

Drinking my morning coffee, listening to the what was Florida wilderness out back being churned and converted into housing. Local strip malls, parking space unavailable. I watched Reagan's tax cuts met with a rolling market by August of 82, then watched the largest tax hike in history, announced at the SOTU of 93, met the same interval of time later with another rolling market.

America is so big, it's economy so massive and with a mind of it's own, policy bounces off of the mammoth like the arrows of pathetic, little men. Rome rumbles on. It occurs to me that the president, in all his rockstardom and oprahglamour, is as relevant as Armstrong.



 One concept common in turf handicapping is the speed rating. It's not so much whether the horse wins the race, but what its fastest time was for a given quarter or some such. One wonders what the ideal predictive speed ratings for markets are. If we come up with the answers, we may be able to contribute to the ecology of the system and possibly prevent our losses from being as great as the public.

Gary Rogan asks: 

At first glance, I'm wondering is the history of speed ratings for any markets likely to be as predictive of the future as it is at the track?

Russ Sears writes: 

When someone is starting training for distance running, it is important to understand the maximum heart rate. Then training is geared around this number. The pace you should run to achieve different objectives is a range of percentage of this number. For example a speed workout, you might want to hit 90-95% of this rate. For a recovery run, maybe 60%. As you learn the pace to achieve these objectives you can stop measuring your heart rate and then go off feel.

However, as you get fitter, it becomes more about the recovery time to a base rate. The time it takes for your heart to get close to pre-workout rate will get shorter as your fitness increases. Then as this get shorter, you can increase the pace or shorten the recovery time between faster intervals.

It would be interesting to carry this over to individual stocks with volatility analogous to heart rate. Shocks such as earning numbers analogous to workouts. I hypothesis "fit" companies are ready to take more risk and have higher expected earnings. Whereas those whose long vols are increasing may be more likely to fall apart if they take more risk.

Anatoly Veltman writes: 

I think that Chair is often faced with an exit problem. Statistics prompt justifiable entry– but then one is prone to take profit too quick, or not be sure what to do about a loser, which only looks statistically better and better the more it's losing.

Therein lies the huge difference between binary outcome in most sports/games, and the investment field. I recall one Palindrome saying: "it's not whether you've picked a loser or a winner; it's more important how much you have ON when you're having a real winner".

An avid observer of track and field legends since watching my first Mexico Olympics live on Soviet TV in 1968 (the black power pedestal protest contributed to airing of that broadcast!), I always attempted to grade medal performance against the world records. I can name dozens of great Olympians, who peaked out during certain Games (sometimes 4 years apart, and even 8 years apart!) — and never held a world record in their event; and vise versa…phenomenal record holders, who've failed to taste Olympic success. But most of them did achieve both — which, again, makes statistical sense.

Alston Mabry adds:

A core "speed rating" question is around the effect of news events such as earnings surprises. The nature of earnings surprises has changed over time, as companies have learned to manage earnings more precisely: "Rich Bernstein Explains Why Missing Earnings Estimates These Days Is Such A Disaster". And then there is an assumption that market efficiency means any true surprise will be reflected in the market within minutes. But is this true?



 A lesson I learned from Einstein is the benefit of being able and willing to changes one's mind. At times a pacifist, he changed after witnessing the rearmament in Europe. In physics and science in general when presented with new evidence it is quite normal to revise theories and mathematical proofs, or even to reverse a position entirely. Putting ego aside, he did this many times, most famously dropping his famous Constant variable regarding a static universe when through experiment it was proved no longer necessary. This is skill which comes more naturally at a younger age, but is quite possible for the post 40 crowd as he demonstrated in his long career.

Russ Sears writes: 

It seems to be increasingly clear that part of Einstein's long term productivity was due to his long walks often with Godel. It makes me think of this article: "Exercise Grows Brain Cells".

Dr. Brett S. maybe able to clarify, but it is my understanding that some of the latest ground breaking research shows that "changing your mind" is more than just a figure of speech. It appears that meditation can reroute the neuron wiring especially between the regions of the brain. This may also produce new brain cells. Or perhaps it uses the new cells produced to strengthen the bridges between regions.

Brett Steenbarger adds: 

There's also interesting research on brain changes following successful behavior therapies, such as treatments for phobias. And, yes, a good amount of research on brain changes related to meditation practice. What's most interesting is that the brain changes following effective medication are nearly identical to those following effective talk therapy:




 I found this interesting post on Seth Robert's blog:

"The Emphasis on Education in China"

One of my students grew up and went to high school in Nanjing,
population 8 million. Her acceptance to Tsinghua was such a big deal
that when her acceptance letter reached the local post office they
called to tell her.  The post office also alerted journalists. When the
letter was delivered to her house, there were about 20 journalists on
hand. One of them, from a TV station, asked her to say something to
those who failed.

Russ Sears writes:

I found it a very sad piece of social commentary. At some point it becomes not about your ability to think, but only about what you know they want. It becomes less about answering the question than knowing what questions the test giver will ask and answering it strictly as they want. You begin by eliminating the questions that cannot be tested.

Where are the questions that take a lifetime to answer?

Where are the questions that do not have a standard knowable answer?

Leo Jia responds:

 Well, it surely does not find an Einstein.

But society is not all about geniuses. It requires the performances of normal people on a much larger scale. In that regards, one shouldn't underestimate the advantage of someone's ability in passing intensive multi-disciplinary tests on high scores.

It takes tremendous discipline, dedication, and hard work. But it is not simply about memorizing answers. More importantly, the abilities to plan, to achieve, to think smart, to always be confident, to stay away from distractions, and to beat out stresses along the way are all crucial. It is about winning a game, a mimic to some of the games that are crucial at various stages in life.

Is it worthwhile for all the kids to spend all the efforts in order to pass the tests? Definitely not to those who lost — a high percentage of the people involved actually. They are clearly not good at the game (perhaps they have learned a lesson through the failure). So overall, the society has wasted quite substantial energy — the energy spent by those on the wrong game. But perhaps that energy can not be saved anyhow. It is just like the market where there are winners and losers, and the losers are required there to supply the liquidity and to make the winners winners.

I fully agree about the deficiencies of the education system, in the sense that it does not serve individual talents very well.

But unfortunately, the modern education system since its inception in the Industrial Revolution is more on social conditioning than anything else. We perhaps shouldn't expect more from it. The Chinese, finding that it fits well into its own tradition, have just pushed it more to the extremes. I don't know how to abolish it all together and what to put in its place. Would a system that only focuses on producing talents (we have to define the meaning here) work? It most likely would for the talented individuals. But overall? Certainly, a lot people have various kind of talents. But don't we agree that a high percentage of the population don't have much talent? If a system is only for talent, then what to do with these people? Moreover, talented people generally tend to be somewhat eccentric. Can a society endure too much eccentricity?



To answer my own question.

Using the last 100 daily returns of SPY as the "x" and HDY (ishare High dividend ETF) as Y I got the following linear regression:

y = 0.6279 x + 0; with R^2 of 68.2%

and today .52% - 1% (.63) gives negative Alpha… -0.11.

Certainly within statistical significance bounds, but negative none the less.

Jack Tierney writes: 

I hold a number of dividend stocks and find that although there are more up than down, none of the moves is substantial — certainly smaller than those of the general averages.

What interests me right now is volatility — something that has never been very good to me, but I took a TV break this afternoon to see what the CNBC wise men and their guests think. It would seem that many are expecting Obama to win, the Senate to remain Democrat, and the House to remain Rep.

If today's market is reflecting that expectation, it would take only a couple of votes going the "wrong" way to upset this equilibrium. If the surprise is at the presidential level, the move could be huge…but not necessarily positive as many believe. On the contrary, there is a sizable portion of electorate that not only feels the President should be re-elected but that it is "owed" to him. If they are disappointed, I would expect them to demonstrate their unhappiness in no uncertain terms.

Almost equally disruptive would be a "no-decision" result - at least until a recount (or several recounts) are completed. All this is supposition, but not entirely out of the question. In any event, at least according the Art Cashen, it's not unusual for an election day bounce to be followed by a following day re-tracement. The Chair with his many readily available facts and figures would be able to affirm or deny this.



 Bullies, as adults, generally abuse their authority. If you stand for excellence and have some success you will attract the attention of bullies. It has been my experience that bullies hate a good success story but despise the successful more for the attention and admiration of others than their success. The heroes of myths, Bible stories, and legends are often victims of the drummed up accusations of bullies. Apparently, most ancient cultures were gravely concerned with bullies in everyday adult life.

Here are several tells that a bully's complaint against you is a witch hunt rather than legitimate complaint:

1. You are singled out after publicity.

2. Many interviews are held and are fishing expeditions of your weaknesses.

3. In these interviews, there are two types of witnesses, those that routinely support the bully and those that are intimidated and gladly rat out their neighbor to get the bully to leave their doorstep.

4. The interviews are one sided.

(It is widely known that the bully and their cohorts have immunity for much more corruption. Interrogations do not happen for them. Romance, money and power are often a triangular core. The bully often is a mistress of the ruler in the stories)

5. The bully often will intimidate and harasses the friends and family who would give the moral support to the victim.

6. It makes no financial sense for the bully to waste so many resources pointing out your minor faults.

It makes sense to do whatever it takes to rid yourself of an organization that allows one to be bullied.

I wonder if the moral implication of the ancient stories is correct, that rampant bullying is a subtle sign of an empire or emperors impending sudden chaotic demise…



 An individual defines him or herself as the sum of the impact of memories as well as the person he or she is today. While others, for the most part, define him or herself as he or she appears to them today.

Often this creates an anxiety and tension between the past and the present. The kid wanting to grow up will try to prove it by doing stupid stuff to show that he old enough to handle it.

And likewise the young adult longing for the comfort of his childhood, will often do something stupid to show he's still a kid and needs the protection of adults. The young adults will often swing between these two extremes in a matter of moments, as part of him wants to grow up and part wants to stay where it is safe. The good kid with great parents and a comfortable life, often has a harder time wanting to move forward, while the "rebel" with a hard life or poor adult figures in their life will often look to distance themselves from their childhood.

 Performance anxiety can stem from this. You see yourself as the dumb awkward kid, while the audience sees you as the expert educated adult. By performance I mean anything you do where others are your audience– writing, speaking, analysis, and any artistic endeavor. Besides showing off for the girls, this I believe, is perhaps the reason we often do stupid stuff and also why we can struggle to show our full potential to others.

I have found that recognizing this struggle within yourself and acknowledging and making peace with that kid in yourself can help tremendously with these fears and self doubts. Your art will shine brighter if you let the kid in you that was blown away by ever new worlds that were opened up to them shine. And your analysis will be appear more confident if you see yourself as the adult in your presentation as others do. In other words, embrace the dichotomy, don't hide or internalize it. Acknowledging these two selves, I believe, can help young adults not do some of the stupid stuff they would otherwise find themselves doing.

I have found that acknowledging this geeky 4th and 5th grader inside me that was excited by math, science and the wonders of the world while I am presenting something, writing something or analyzing something can help, yet also seeing that 4th and 5th grader, that dressed funny, was a runt, and totally confused by socializing, especially with girls, was charming, but not who I am today. Also though I expect others to see me as an adult, I know that showing the kid in me makes me much more likable and makes it harder to discount my opinions.



 I'm a big science fiction fiend. Growing up, I went through the Asimov trilogies (and lots of his other works, some of which took on new meaning after getting drunk with him at a bar at a science fiction convention), the John Campbell stories, Niven's Ringworld series, Haldeman's Forever War series, and Dickson's Chylde series, with the latter as a particular favorite. Lots of things we now coming to reality were talked about in these novels and stories. As a group, these writers (excepting Haldeman and Heinlein) tended towards optimism about the future–the human condition would improve, albeit with changes in what was defined as work and how societies functioned in the process of that improvement. Then an interesting thing happened during the 1970s/1980s. While many of these authors continued to write, the new writers were hardly optimistic. When I was at the local Barnes and Noble this evening, I was struck by how dreary the worlds portrayed by current science fiction writers have become.

Is it that we as a society are lacking in optimism about the future–so much so that we are no longer able to imagine one with a positive image (I understand that there are those on this list who will suggest that this is merely my perception, to which I acknowledge it as so being)? Much of the talk about raising/lowering taxes represent incremental changes. I'm thinking about paradigmatic changes; those are the changes that might address some of the challenges of the moment, whether it's water, energy/natural resources, pollution, health and disease control. Perhaps it's the dreamer in me, but if we can't imagine a future in which the human condition is uplifted/bettered, how are we going to achieve it?

Ralph Vince writes: 


I've been noticing much the same thing, particularly with the 20-somethings I am routinely around. The dark, negative future they all, pervasively envision is something I have never seen in such one-sided fashion before.

I've given this a lot of though in recent years and have come to a few conclusions you may or may not agree with — regardless, I'm interested in yours and others thoughts on the matter.

I think we DO progress — I think man's progress is ever-upwards in fits and starts, but, viewed through the lens of 3 or 4 generations, has persistently been higher. I think much of this is incremental, almost unnoticeable however.

Lately, I see changes in pop-culture themes that would make me think that the dark era of the past decade or so is coming to a close. I've mentioned walking into a high-end furniture stores, and the colorful, Dr. Suess-looking furniture invoking a sensation of almost giddiness. I see it in the extreme use of bold colors in television ads of the past 12 months or so, in women's fashion and the elaborate, loud footwear now, and hear it in the driving vocals, unwavering, non-tremulo female power voices replacing the warbling songbirds of the recent past.

The mass mood is changing, it's moving in a new direction already. You won't see young men in pinstripes, though you may, by next year, see the resurgence of seersucker (I've been trying, really, really hard on this last one!)

However, just as change occurs incrementally, it also comes in BOOMs. Jonas Salk, Louis Pasteur……Air conditioning, transistors…….the magna carta.

The Santa Maria.

I've alluded to the enormous undertaking of the interstate highway system (post 1950s) and the transcontinental railroad here as things that paid off many fold.

And we've just been stuck in a period of stasis which I think is bigger than politics and politicians, era's where things are just intractable, and the stasis, like large fields of ice, just take time til things become dynamic again.. To-wit, I present Barack Obama's administration. I truly think he/they IS/ARE committed liberals. I think there truly DID intend to close Gitmo, and many of the other things that didn't get done and are being pointed to (I'm not taking a political stand here, not making excuses for the administration, just pointing to evidence to support my "over arching stasis as a natural impediment to dynamism" idea. We've had periods in history where this HAS been the case. (the natural state of politics in a democracy IS stasis. I think had Obama NOT had a supermajority in his first year, a situation where he has to have every one of his party on board and, it would have been easier for him, and odd twist in our politics)

At some point, the stasis will give and dynamism return — I would venture a guess as a consequence of some unforseen invention again that elevates our existence in a quick burst once again.

I think the more "paradigmatic changes" as you say, are very rarely, historically, the result of political structure changes, of which there have been few throughout human history. Usually, it seems, these changes are a result of increasing the geographic perimeter of our existence. These things HAVE transformed cultures. Were the Romans not transformed by their excursions into Britain and particularly the Eastern Mediterranean? Wasn't the old world transformed by Columbus and the Iberian explorers of the 16th century? At some point (I will not be here) our perimeter will expand, and political structures will amend to the new reality — new problems will be solved.

In the immediate, when I see the one-sidedness of dark expectations among the young-n-naive (who will not all be right), and I see the mass mood of culture assume a new energy, I don;t think we will see an paradigmatic change any time soon (are these things even predictable?) but I do think we'll see a more optimistic era here in the coming years, regardless of who holds political office.

Russ Sears adds: 


While I admire and agree with both your optimism and lovely essay. I believe the turn to pessimism for science fiction has a much simpler explanation. The education system and elite culture has made it a crime to be a boy and has marginalized the importance of exercise, sports and competition for the intellectual boys. The results has been a rigidity of thinking, especially amongst those scientifically inclined. This ignoring of innate emotions causes internalization and depression It has been sad to see as my daughter is attracted to these intellectual young men, but is put-off by the cloud of doom many carry around.

There is an emotional side to all thinking, What the "rational" mind thinks must subconscious join with base instincts signals of the mind to be accepted thought. Rigidity in thinking, without a recognition of the emotions, is the opposite side of the "angry" trader. It causes one to miss the short term bringing out the canes, and the long term emotional side to central planning, fed policy and brinkmanship politics. In both cases, I believe can be shown, that these time periods are not independent random variables, within statistical significant.There also appears to be a symmetry that plays out between short vs long term non independent market movements and respectively stocks vs bond markets. Which I find quite beautiful. But I will leave both these as exercises for the reader.



 I think we can all agree that pursuing one's conviction in life or even a demonstrated talent is hard. Most successful people would contend that the key is through perseverance, resilience and so on. In other words, one should not give up during hard times. I think this should be true for most successful people on this list who have indeed withstood some hardship in the early career but never given up.

This is in sharp contrast with the mostly agreed approach for trading, where quickly admitting mistakes and reversing course is very key. I don't deny that someone may be doing it through perseverance (is Buffett doing this way?). Even Soros has remarked that admitting mistakes is key for his success. It is interesting here that admitting mistakes only applies to every single trade, but not really to the hardships in one's career.

There is the saying about when to hold and when to fold. For career success, the focus seems to be "hold" on, but for trading success, the focus is to "fold" quickly.

How would one reason about the two different approaches or philosophies (perseverance vs. change)? Is one of them wrong?

Craig Mee writes:

Leo, I would humbly say, one is a number game, and the other is what you do…and with that you can certainly do some fine tuning. Problems may arise from a number of things not central to what your preferred "business" is.

Russ Sears writes: 

As a marathon runner who use to be national class, it has been my experience that persistence is only part of the battle. It is very easy for a proclaimed prodigy to persist. What is hard is learning to turn a short term loss into a long term lesson for life. If you watched the Olympics here are a few things that the athletes seemed to do differently than most people.

They embraced the pain. Training and hard work was enjoyed. But they also learned from their losses, injuries and general hardships in life. Perhaps these fires are the purifying necessary part of the upbringing that the prodigy misses. Learning to believe in yourself despite what others say, turning losses into a chance to strengthen weaknesses. Things whose first order effect is negative but whose second order effect can be positive are highly favored.

2. They were optimistic about their chances, with a healthy dose of realism about their abilities, their current condition and plan. Before and after the event there were no excuses. They had a plan, believed in the plan and stuck to the plan.

There were very few people's opinion that mattered to them, their coach, their immediate family (Dad, Mom, Husband or Wife). They did not care what the critics said, they did not depend on crowd support and were not disheartened by disfavor.

4. There were many opportunities from competition. They found their niche from competing more. While the Olympics may be the showcase for their event they were not dependent solely on its outcome. Worries melted in abundance of gratitude to coaches, training partners, family, other supporter, G_d, and country

5. They were focused on the task at hand. They knew how to avoid the distractions and discount the hype. Yeah, this may be the defining moment in their lives and how they may build their fortune, but as the song says "there will be time enough for counting, when the dealings done."

6. There appeared to be admiration for their fellow competitors. This Olympics were notable in that there were fewer accusation of doping, tainted judges (with a few exceptions about some referee) and general cheating scandals. The badminton scandal being the biggest scandal, suggests to me that the athletes were into the competition more so than the best way to game the system. Perhaps this is an inverse reflection of the markets. Or perhaps simply the media has become part of the cover-up captured by the hype, rather than the watch-dog.



I disagree that the Fed is the major long term source of how governments are affecting the markets. This is a short term, old school way of thinking. Not that a trader can ignore this.

The major source, I believe, is benefits to seniors and the uncertainty that surrounds them. This is a global issue. The current projectories are clearly unstable, but the politicians have turned it into brinkmanship maneuvering of Euro and budgetary fiscal cliffs.

If in the 80s we conquered inflation by finally understanding wage expectations, in the 21st century will we conquer deflation and societal extreme risk aversion by benefit expectations? Is there an answer? Are we doomed to politicians promising and giving in the short term more than is possible in the long term for the vote? If so, where and when must it all come crashing down?

Gary Rogan writes:

You say in the 80s we conquered inflation by finally understanding wage expectations. I thought inflation was conquered by raising interest rates by a huge percentage. Is that not the case?

Russ Sears replies:

Yes, that was "how" it was accomplished, I am suggesting "why" it had to be done that way. It was the wage price spiral or "inflation expectations". They had to convince people they were serious in lowering inflation long term. Not flood the world with $ every time it was politically expedient to do so.

Gary Rogan adds: 

I realize there were inflation expectations and they were blamed for inflation, but fundamentally there was just too much money being created. I don't think we disagree, I just learned to think of inflation expectations as being derivative to the money supply. Whatever the details of inflation creation, you cut the money supply and inflation will be gone sooner or later. Less money = lower inflation, whatever people believe.

Rocky Humbert writes: 

If anyone can demonstrate with any degree of quantitative rigor

(1) How politics can be quantified.

(2) How politics can be predicted.

(3) How either of these things can be useful to investing in an objective way, then I will embrace political discussions wholeheartedly.

But before you folks try to go down that path, I have to point out that if you own stocks, you should pray for Obama's re-election. (hah)

David Lilienfeld writes: 

The assumption on the Dem vs Rep analysis is steady-state, i.e, the structure of the economy is steady-state. In the age of globalization, that's probably not true anymore, so the analysis, while interesting, isn't informative about what the future might hold. Further, I don't think it will much matter which party wins the Oval Office economically since both parties are going to try to spend like crazy. The alternative is to control the deficit, which may have long-term benefits but which will have short term political pain. In an age of instant gratification, I doubt that the politicians of either party are willing to take the chance that their prescription for the economy will show its benefits before the next election. Just as Wall Street analysts live and die by the next quarter's earning, so too do politicians. Call me naive, but spend and let someone else figure out how to deal with the consequences has become as American as apple pie. I see neither political party providing any basis to suggest otherwise.



 A common mistake that stock people do I think is to pay attention to the increase in sales numbers. What does this have to do with future profits? I would think there is zero correlation given the earnings change since sales are so easy to manipulate by such things as discounts, pre-orders, and incentives for early buying, and reducing inventory et al. How did this ridiculous emphasis on the sales increase become as or more important than earnings relative to expectations in affecting stocks after the earnings report? I recently met with a pairs trading outfit and gave them 100 reasons I don't think it works, but it was from the seat of my pants. The main reason was of course that it goes against the drift. It hedges against the 10,000 fold return.

Gary Rogan writes: 

If sales increase while profits are decreasing, that's a bad sign. However when profits increase while sales are decreasing, this may be very good, but it can't go on too long. Sales trends gained influence as a counterbalance to profit growth being fudged. When you have profits, sales, and cash flows all increasing in unison and indebtedness not increasing, that's as good as it gets. 

Jeff Watson comments: 

Profits increasing while sales are decreasing are usually a sign of increased productivity, better inventory management, better management of labor, and better management of capital. Although Gary says this scenario can't go on too long, it really can go on forever. 

Gary Rogan replies: 

Well clearly it's mathematically possible to decrease sales by .1% per year and increase profits by .1% per year close to forever so "too long" was perhaps a bit harsh, but at some point in the real world gross margins become so high as to make further advances impossible due to competition or substitution. My statement was prompted by not being able to recall a real scenario of sustained profit growth and sales decline resulting in a good outcome having looked at hundreds of income statements, but I've never made a study out of it nor have I looked at multi-year trends. When customers are buying less of your stuff year in and year out that usually means they are not excited about your stuff, because they don't like it but perhaps in this case because the price is too high for them to use more of it. When customers get into the habit of using less of your stuff, that's hard to fight. 

Jeff Watson adds:

The Chair is 100% correct. Going back to Sears as an example…their aggressive pricing will only squeeze their retail operation out of business(if continued long enough), as prices this low are unsustainable in the long run. If a store has a 30 percent increase in sales after implementing a big sale, but it's gross profit goes from 22% to 6% or less, is that a good business plan? Even though Sears is not increasing labor to handle the increase in sales, the model is still badly flawed. I understand that one of the most important things in retail is buying right, but I suspect that most of the things Sears is selling is a loss leader. Maybe they are subscribing to the old cliche, "We might be losing a little money on each sale, so we'll make up for that with the increase in volume."

Russ Sears writes:

Coming from the world of insurance, when things sell unexpectedly well the actuaries double check their pricing. The agents and the market will quickly spot when you are selling $1 or risk coverage for 99 cents. When I started, before rate books were online, a printing error cut-off the $1 handle of 70 year old women term life insurance rate per $1,000 (this was highest age we sold term to). The month after the book went out we had more 70 yr. old women apply for insurance than we had in the past several years combined.

In other words sales increases often indicate increase in claims volatility. Sales increases make me wonder if management really knows what they are doing. One wonders if this rule holds for the retail and stocks in general. 

Carder Dimitroff adds: 

I may be naive, but in some sectors I believe the top line could be critical for long term investments. I'm thinking of regulated and capital intensive companies like electric utilities, gas utilities, water utilities, pipeline companies, transmission line companies and MLPs. In a different way, I'm also thinking of non-regulated utilities, such as independent power producers, refineries and REITs.

In all these cases, if the top line falls, the bottom line is plagued by fixed costs, such as interest, ad volerem taxes, depreciation and amortization.

The second derivative of revenues in such cases is capacity factor. Low revenues suggest low capacity factors. Low capacity factors suggest troubled assets and long-term challenges. The assets could be partially stranded by market conditions.

An example is marginally efficient coal plants. With low market prices for natural gas, many coal plants find themselves out of merit and not dispatched (zero earnings for producing energy). When natural gas prices return, marginal coal plants are again deep in the merit order and they are dispatched frequently or continuously.

Julian Rowberry writes: 

An internet marketing equivalent of over valuing sales figures is over valuing social media subscribers. Twitter followers, facebook likes, page views, ad clicks etc are all very easily manipulated.

Leo Jia adds: 

Here is my two cents regarding growth vs non-growth.

The present value of a business without growth is much lower than that of a similar sized growing business. So one obvious question to any business owner is whether he would like to receive more money or not if the business is to be sold today. The answer is obvious. But one may counter: since he is making good profits on the business, why would he sell it today? Well, isn't that the beauty of modern finance produced through Wall Street? To sell it today, the entrepreneur can collect today all his future earnings projected based on the best periods of his business performance, and with that reward, he can move on with his life, rather than be tied up by the business which may turn sourer later and cause him to suffer.

Why would Wall Street care more about growing businesses? Those people who bought out the entrepreneur have an even higher reward outlook than his and would seek higher profit on the investment.

Art Cooper writes: 

An example of this currently in the news is Hormel Foods, described in the article "Spam Sales Boost Hormel's Profit" on p B4 of today's WSJ.

The article notes that Hormel's Q3 earnings rose 13%, led by strong growth in products such as Spam and Mexican salsas, continuing a trend of higher YoY earnings. "Even so, rising commodity costs and shoppers' resistance to higher prices are pressuring its profit margins, which could affect its results in future quarters."

HRL's price has been roughly flat for a year.



 As an island resident we have to worry about hurricanes this time of year. Lots of interesting things about hurricanes but one of the biggest is they are pretty unpredictable looking out a few days/weeks. A look at any "spaghetti" chart will show that the current storm, Isaac, might end up in New Orleans or it might end up in Boston. A pretty wide range. Generally it is best to have some supplies on hand when living in danger zones but to avoid closing the shutters and making amends with the almighty until the storm is right on top of you.

That said, all models seem to predict fairly well in the short term. Has anyone looked into spaghetti models in predicting market movements? Thus far my simple google searches haven't turned up much in the way of the math behind the models. I know some weather predictions involve the Lorenz indicator and elements of chaos theory so perhaps that is a good starting point.

Gibbons Burke comments: 

Interesting fact: Isaac in Hebrew means "he laughs" or "he will laugh". Sarah, his mother, laughed when she overheard the prophesy of the three visitors telling Abraham she would bear a child within the year, past the age of childbearing.

Russ Sears writes: 

I believe you are looking for Lorenz Equations.

While not my expertise, I think this is best visualized as two circular motions pushing against each other, the pressures, speeds and dynamics of eventual interaction makes the path "chosen" impossible to predict exactly. Often they will "spin" in one direction or the other because a very small tipping point gets rolling and will be opportunistically reinforced.

Others like to illustrate it with the "Lorenzo Water Wheel".

Here is a video illustrating it.

Perhaps the water wheel is a better analogy to the markets, The bulls are pouring money in, the bears are leaking it out and the financial/economy weighs the inertia and gravity to the spin.



 When falling at more than 75 miles an hour, starting from above 100 feet above the ground off a tree, the custom is to yell "headache". Apparently certain death is imminent. I haven't figured out if it's a courtesy to those with the pine box, or just to get out of the way not to die along side.

A certain pres candidate was telling us that he fell 50 feet from a tree after power gliding and did not know the proper call. He lost 1 1/2 inches immediately and it took him 2 1/2 years to recover. Tore all sorts of vertebrae.

One has been in that situation in the market many times, and now I know what to call out. If you hear me, or as a courtesy you are in that situation, you know what the word means.

Russ Sears writes: 

I would suggest that this is akin to arranging the chairs on deck or playing in the orchestra on the Titanic. Its purpose to give your left brain a vacation, through a mundane task so as not to panic. The time for logical analysis has passed. While at the same time giving notice to your right brain to engage in humor, art or intuition to create the highest probability of survival and one last chance to take in the beauty of it all; to go out living. 



 Where does one learn about the economics of the farming business. I'm curious if there is a good place to read up on a sort of income statement on farming on a per acre basis (averaged across different crop types and soil grades). I'm curious to understand the economics of the business of farming.

Vince Fulco writes:

King Corn is a short and amusing documentary (found on netflix) which documents two college graduates who decide to return home to their grandparents' town in Iowa. They rent an acre of farmland and attempt to grow corn all the while profiling the inputs and costs. Needless to say with no economies of scale they make a pittance netted mostly from govt programs.

Big River was their second movie documenting the amount of pesticides which go into our food supply and the prevalence of odd cancers in farming families; striking more wives than husbands.

Scott Brooks writes: 

I wrote this post back in January of 2008…..so it is very dated, but I think it will give you a good primer on the subject of growing and the economics of corn from a ground level. List member, Mike Ott is a MUCH better resource on this subject, but I think this will give you, at least, a decent idea of what's involved in growing and raising corn.

Russ Sears writes: 

While not an expert on the subject, my in-law are crop farmers and my paternal Grandparents rental farmed until they passed.

Much of the individual farmer's income statement depends on the type of agreement from the land use. (Rental, share expenses and crops, debt on land, corporate owned, farming own land etc.)

But I believe Scott posted the basics with perhaps a few notes. Property taxes are a big expense for most farmers. Also profit/losses on the value of the land should be considered. Most farmers are asset rich and "cash poor". Often they take out short term loans on the seed and fertilizer. Plus they often have some leverage or debt on the land. They generally keep this to a minimum so they can withstand some shock and long term downturns. (lessons learned from 70's and 80's) Most farmers budget their living expenses They often put off purchasing equipment and new cars/pickup until a good if not great year. Darwinian nature of the business has left a pretty conservative bunch for the individuals who still farm.

They also sometimes leverage to diversify their holdings investing in stocks and bonds.

The average farm owner is generally above 65. But if not often they take second jobs or have the wife work for health benefits. As independent business health insurance can be very high. Social Security and Medicare are also part of the taxes or part of the income depending on age.



 On first reading Kahneman's Thinking: Fast and Slow I believed the only possible reason he could have been so wordy on purpose was because he believed in the "tell it 3 times if you want people to remember" theory of teaching. But upon reflection it seems perhaps it is simply an old man waxing on and on about his glory days. So skip the pages once you got the point.

While a great read for presenting his research, it was not without biases of its own…as the Chair is fond of saying he presented his case too strongly for the meme that has the world in its grip "our purpose in life is to share…". He simply ignored any research that proves "skill" is involved in being "above average" and focused almost exclusively on "reversion to the mean". Or that poorly designed incentives can make matters worse. Or that "greatness" can be proven to have some luck. That is even in some of his examples "the mean" of a group is several standard deviations from the average of the population, but he implies they were simply "lucky".



 I am at a loss why seemingly great athletes — those you would expect to have the keenest kinesthetic awareness — seemingly struggle on the dancefloor (I am not referring to ballroom-type dancing here…..not just shaking around on some club floor). I used to think that they were merely overly-self conscious, and this was causing their seeming stiffness. Yet, these very athletes excel precisely because they do NOT stiffen up and understand perfectly well the necessity of avoiding that, as well as preventing adrenalin surge, or coping with it in beneficial ways.

Peculiarly, the only atheletes-turned-dancers I have seen who can perform the dancing aspect gracefully are those who are boxers or very good standup fighters.

And the more I have watch this, the more evident it has become to me why (this is my hypothesis, which I am seeking feedback on here). A great ballroom dancer, like a great boxer or stand up fighter, has to have his feet under him such that if he were wearing a belt buckle, it would be slightly pointed upwards. In all other sports, be it playing shortstop, returning a tennis serve, a hockey player…..there is a certain, crouched position where the belt buckle is pointed downwards.

Yes, the best boxers, the best standup fighters almost invariably have tremendous footwork, where even their punches come from the balls of their feet (watch a slow right cross from Ali, how the ball of his right foot pivots, the heel up and turning outward, allowing that complete extension through his target). Many of these guys are often even built much like Fred Astaire, light not just in bodyweight, but seemingly light on their feet as well (though, not to the extent of Astaire, who must have been filled half with helium, the man was truly superhuman). Yet, footwork aside, it seems the angle of the belt buckle, in a range of, say, ten degrees, is a hugely discriminating factor in what permits an athlete to go from his game to the dance floor.

Russ Sears adds: 

In my opinion, there are at least 2 reasons "great athletes" are not dancers both stemming from your definiton of "great". Most of the highest paid athletes need 2 things extra-ordinary size and extremely high levels of fast twitch mucles.

The size comes at a considerable price to "grace". Extra ordinary increase in growth during teen years happen with increase muscular strength often very awkward years for even more normal sized men. It takes much more to control a large body to make delicate movements. Those needing the speed spend considerable time training for raw speed, to go with that size, not necessarily intricate steps and bends. Those needing delicate touch, likewise spend considerable time to get the hand/arms to move just so.
But perhaps more important is the fast twitch need in most of the highest paying sports leaving the "great" athlete with little endurance. Endurance comes with a more balanced slow twitch combination. A cardio taxing dance last several minutes long.

Dancers have considerable cardiovascular fitness, as do boxers. The middle distance runners I have known often are great dancers and often make great boxers and vice a versa. In the olympics note the events that last 2-5 minutes at a hard pace with no rest and you probably have some great dancers. The longer events suffer the opposite, slow twitchers can't jump but have great endurance but lack the explosive movements ability.

Anecdotally, didn't Apolo Ohno win "Dancing With The Stars" one season? 

Duncan Coker writes: 

I used to take lessons and compete in some pro/ams back in the 90s in New York, and also got to know a lot of the professionals at that time, mostly British and Russian. Ralph is right about the position of the man's belt buckle as it is quite important. The center helps create a floating style important in ballroom. Also interesting, the term swing as it applies to ballroom dance is not really about 1940s swing dancing. Rather it means to mimic the swing of a pendulum in fox trot and waltz. As the dancers are moving laterally across the floor they are also gliding up and down. Another position technique that was taught was contra body movement (CBM). It means to move the feet and legs in one direction while maintaining contact with a partner in another direction. Most professional couples start dancing in childhood, so the steps and physical attributes are ingrained early. I can see how many of these techniques would be hard to learn by even accomplished athletes in other sports later in life.

Ballroom is a strange and wonderful world. It still amazes me the tv shows are so popular, but I think it is great.

Ralph Vince writes: 


Once, in working with a biochemist-turned-programmer, and talking about my pathetically slow running, the Chinaman, the biochemist (who was no runner, not the slightest athletic propensity whatsoever) told me that age, weight, and cellular mitochondria were the limiting factors. The only one I could really change was my weight, in order to get faster.

Now, I don't believe that entirely, because that would mean that whatever training I did only benefited by whatever weight I took off, and clearly there are 02 factors that you can train for, etc. But he did point out that I am not going to cut my average mile time in half — a valid point. He then mentioned that in all creatures, speed is a function of how much mitochondria is in one's cells, with, say, a cheetah having a great deal of it, human beings, in differing degrees, of course, possessing far less.

Now, this has nothing to do with Fred Astaire's ability to beat the living daylight's out of most thugs (I am convinced a man with his feet and coordination could have done that handily, and I say that based on the little thugs I knew in my youth who were physically disposed in similar though far less amazing ways) but I would like to know your take on that given your background in the world of running.

Russ Sears replies: 

Despite the popular assertion to the contrary you can not "be anything you want to be." relative to others. No amount of training will get a sprinter to turn into a distance runner and vice versa. I believe it was Flo Jo that after retiring from sprinting tried to become a distance runner. She was very dedicated, hired smart coaches and believed she was going to be great… but never ran a 5k faster than about 21 minutes. Now this is a decent time for the general population. Competitively this would only get her onto most high school girls cross country teams. In most teams even small schools this time would not be the best on the team. In evaluating kids to guide them into the right event to try out for in track in field I have tested for the following.

Sprinters- Fast twitch explosiveness- standing and running vertical jump relative to size. Muscle size relative to strength is important, lean muscles verses bigger more explosive. Bone size is also important.

Stalky - bigger muscles large bones, built for sprinting and short middle distance.

Lanky - Small bones, lean muscles for distance and longer middle distance. Middle distance - repeat 200 meter and 400's times. Distance VO2, max heart rate, and recovery time - Push-up and pull-up counts coordination for most field events - timed box steps up and down in patterns. Weight /Size and arm and leg strength with fairly good fast twitch relative to size for throwing. Small bones but explosive for high jumpers. Pole vaulters - coordination, explosive, stalky, fearlessness- look for trampoline and diving craziness.

You can be good at an event simply by loving it, training for it, have some core athlete talent and being in shape, but to be great you have to have several genetic factors in your favor.

Some of these factors can be changed by type of training, eating and lifestyle while young etc. But you can not completely reverse them by nurture. Most people that run regularly will see their times drop for many years. It takes about 10 years of hard cardio training to fully develop your cardio system. But your body will break down due to training before it could develop someone without the core body type and muscle types into a distance runner.

Peter Saint-Andre writes: 

Lessons for traders and investors here? Probably some folks are built for short term trading, others for long-term investing, others for building companies directly, etc…



 In a recent trip to the Netherlands, I noted the weakness in the Dutch real estate market. This brought back a memory of a speech by Alan Greenspan in Cambridge, referencing a PhD thesis, that a loss on the value of one's home (nest egg) had twice the impact on consumer spending as an equal loss in the stock market (risk capital). According to Behavioral finance, "errors" like this are a natural tendency of people, and hence persist (are not averaged out) by Mr. Market. In principle, a shrewd investor can take advantage of these market inefficiencies.

The problems with Dutch real estate, similar problems in Denmark, not to mention Spain, do not bode well for European consumer behavior to my mind, possibly for years to come. Does anyone have any thoughts or data on this?

Secondly, my hypothesis regarding the origins of the real estate problems in the US (also possibly Europe, Japan?) has to do with the "baby boom", (the overreaction to the loss of good men in WWII.) One definition of the baby "bubble" are people born between 1946 and 1964 (average 1955), which makes the average baby boomers roughly 57 today. My hypothesis goes like this: as the baby boomers retire, or approach retirement, they shed risk assets or assets they are overleveraged. In this case real estate. As this process ends or mitigates, the real estate market should improve, with dramatic consequences for US consumer behavior. (not tremendously original, I know.)

My question in this: Does anyone have any data on the demographics of people shedding assists, particularly real estate, related to retirement? That is, a graph hopefully showing the peak of asset shedding by people in their 50's and 60's?

Thanks in advance for your thoughts, criticisms, or data,


Andrei Kotlov writes: 


Two quick remarks (but no data) :

(1) Curtailed consumer spending is good for the economy (current consumption destroys capital; production is [mostly] in anticipation of future consumption).

(2) The U.S. housing bubble was caused by the easy-money policy of the Fed; rather, that policy ensured that *a* bubble would appear; other factors (e.g., acts of Congress) directed the easy money into the housing specifically. What you describe (shedding of real estate by the baby boomers) could explain the *burst* of the bubble—though, in my opinion, the burst occurred primarily because the Fed [temporarily] reversed its easy-money policy.



Jack Tierney writes: 

I don't know that your hypotheses will hold up. I agree that Boomers, and more significantly, their parents, will want to shed assets - including homes and equities. I believe Boomers, like current retirees will find it easy to sell their homes (or condos) IF they're willing to take a significant haircut. Despite what real estate cheerleaders might claim, there's no getting around the facts (from the Fed) that between '07 and '10 the average American household experienced a 39% decline in net worth. The following two years have seen no improvement. Traditionally, those most likely (and financially equipped) to purchase a single family home are college-educated professionals. Unlike those of other past generations, these will be populated by graduates who carry significant amounts of debt - and their creditor is the most relentless, and unforgiving, collector imaginable - the Federal government. Since these debts cannot be negotiated down, expunged by death, or bankrupted away, they will be paid down before capital accumulation can begin. As a result, the cohort most likely to support a resurgent real estate market will be, at best, delayed in bringing it about. Even then, there is and will continue to be a contraction in wages. Significantly, the post-Boomer generations (Gen-Xers and Millenials) will be, relatively speaking, financial beggars. We must remember that the technological advances we can't stop raving about came about as all business advances do - to reduce the cost of production…and wages are (or used to be) a big cost of production. Those few who have been able to overcome the "math is difficult" meme and obtain an education (and degree) in a handful of specialty fields will continue to do well…and will become home owners assuming they have also learned to save…a problematic assumption.

Another cohort, which will include a significant number of college grads, will fight for positions that offer something a little better than above average incomes…they may become home owners but their zip codes, like mine, will not be noted for country clubs, cotillions, or Chris Crafts. A similar cohort, but one slightly less fortunate and/or ambitious, will contain a fair representation of graduates from every level, and their lives will be marked by a payday-to-payday narrative. Some in this group will never repay their education loans and either move in with family members or migrate from one transient hotel to another. They will not contribute to a real estate boom or consumer spending. The final group will be composed of the poor - working and otherwise. I have no idea how big it will be, but am sure it will be substantial, it will be urban, and it will be restless. Public housing will be the order of the day but among its residents there will be those who recall the "good old days" when various government sponsored programs were numerous and sufficient. Some will recall the wealth that existed, how quickly and inexplicably it disappeared, and the culprits (real and imagined) who destroyed it. The primary concern of the government, whatever form it may have taken, will be, as it ever is, to maintain docility.

While these developments might well result in "dramatic consequences for US consumer behavior," I doubt we'll ever see a housing market or the level of consumerism like that we experienced following WW II. It not only requires great wealth, but a great concentration of wealth. The kind that exists only when your major competitors have destroyed their manufacturing bases not once, but twice, in three decades - and yours remains unscathed. Under those circumstance you can build homes or automobiles with varying degrees of quality, pay substantial wages, and still have an incredible boom.

Andre Clapp responds: 

Hi Jack,

Alas, I think I agree with you. Looks like we're in for some tough sledding for at least another decade, maybe longer. Not to sound too much like the writer of "Generation X", but I think that the argument can be made that this older generation (including me) has very much "borrowed" or "stolen" from the younger generation. (Pay as you go SS might be an example of this. The high cost of healthcare, the national debt, etc.)

In this sense, I am somewhat sympathetic (often unpopular in financial circles) to the inflationary monetary policies of the Fed and the ECB. Although I agree that printing all this money amounts to "confiscation" of wealth from Savers and bond holders, I think it may be morally justifiable as a politically feasible way to transfer wealth from the older to the younger generations. At least give the younger generation some motivation to work, invest, and take some risk, as opposed to moving in with their parents/grandparents and playing video games all day. I believe we have seen the later in Japan, which to my mind decided to let deflation run its course (and protect the savers and bond holders, which of course are predominantly the older generation.)

What do you think of this?

Also, it is notable that despite the trillions of dollars that have been injected into western economies by the Fed and ECB, it has yet to produce meaningful inflation… Any thoughts on this? Is the psychological impact so great that no amount of monetary easing will produce inflation? Can't push on a string kind of thing?

I couldn't help noticing that the Danish government recently sold bonds at a negative yield.

Best Regards,


Andrei Kotlov writes: 


Two quick thoughts:

(1) Inflation (money printing) amounts to enriching those who stands by the printing press (the gov't) and confiscation from those who are removed from the printing press, in proportion to their distance. The savers (the older gen) will suffer just as much as the future lenders (the younger gen) who will pay the higher rates.

(2) Money printing has not lead to 'meaningful inflation' *yet* because it has been done concurrently with the naturally-occurring deflation (caused by the contraction of credit).

Gary Rogan writes: 

To advocate as "morally justifiable" the despicable activity aiming "to transfer wealth from the older to the younger generations" is itself not morally justifiable, regardless of how much the younger generation is expected to benefit.

Also another reason why this activity hasn't resulted in inflation yet is because the Fed is paying banks significantly higher than the market rate to keep their excess reserves on deposit there. Sooner or later this music will stop, and there will be a flood of inflation that will be declared "unexpected" for months on end, just like the number of unemployment claims has been.

Russ Sears writes: 

For a bigger picture that takes finance into the picture look at the census data on home ownership before and after the bubble .

The meal for a life-time I believe is in the anatomy of a bubble contained in the home ownership percentages.

Ownership rate in the US was 63.9% in 1990 with the magic of Mortgage Backed Securities, the Fannie and Freddie programs this was raised to 67.4% by 2000. Then came the push into sub-prime and this was raised to 69.0% by 2004… It hoovered at this unsustainable level a couple years where the greater fool seemed to take over before the dam broke in 2007 with a drop of 0.7% (68.8%/2006 to 68.1%/2007) and the QE fix was in to keep it from continuing the crash and clearing the market. The home ownership in 2010 still stood at 66.9% off 0.5% from 2009. I suspect your conclusions are correct that with the lose of government subsidized financing the ownership rates need to get back to closer to 1990 levels.

However, looking at the numbers it would appear that the older ages have continued to value home ownership.. Those aged 65+ followed a similar path of the overall demographic until recently. (76.3%/1990; 80.4%/2000; 81.1%/2004

With the lower rates they appear to be the ones that currently are taking advantage of them to purchase housing. going from 80.1% in 2008 to 80.5% /2009 and 2010)

This group may very well continue to drop below to the 1990 levels once the rates are not being stimulated.

However, as an actuary well aware of the risk of out living your wealth, I would argue that the home ownership is many elderly household's main hedge against long term inflation. Plus the nostalgia of setting roots and maintaining an inheritance. They would need to be clearly convinced deflation is here to stay before they give up on home ownership.

Gary Rogan writes: 

Andre, I'm not sure which intergenerational theft mechanism you mean (one could argue that say Social Security is some for of that type of theft or whatever), but regardless:

Just talking about returning wealth to its rightful owner is communist rhetoric and implies collective punishment for a class of people. There is no justice in making a group of people pay for something they didn't individually undertake. There is no justice in making members of this group pay out of any proportion to how much each of them supposedly "stole". There is no justice in an unelected and unappointed (for this purpose) body extracting this retribution, especially without even a semblance of due process. There is no justice in this body using a totally spurious explanation because it's politically convenient for undertaking this sort of justice.

Of course as a practical matter, this is just theft in order to make the constituent banks whole and to impose taxation by more palatable means mainly to support those in power staying in power. Nobody has any intention helping the younger generation. But to me, justifying collective theft as collective punishment or justice is simply abhorrent.



 It is interesting how Doc Rivers got his name. He came to a training camp wearing a Doc J sweat shirt. Ever since, the players perpetually have been calling him doc. I like to give nick names to people. Called wisdom "the Wiz". Called John Normile, "normal" or "Doji". Call Michele "Ms. Increment " Yes. I am "the Chair " because it's sedentary. Called the guy who invented "trading algorithms for NYSE "Mr. Small" because he programmed in Small talk.

On another front, I don't know much about basketball but to me the best player I've ever seen is Durant. He can shoot well from outside or inside, and is very fast. So many of the others can only play well when they're a few feet from the basket like James, or Melo, and when they're forced deep have an average eye, and lose the game by shooting because their team is unlikely to get the rebound. Trading for the trend following reminds me of Melo's 30 feet one on one. The other player I think is second best, is Iso Joe on the Atlanta Hawks who again can do everything. I wish I knew a trader like these two, or could aspire to it myself.

Russ Sears writes: 

Of course since I am currently residing in OKC area, I've watch a few games. As a runner what struck me was how good Durant was in game 6 in the third quarter, such patients and confidence when the Spurs had spent their legs in the first half, Durant then took it to them. His endurance began to wane in the 4th, but was still above the Spurs starters. Both coaches in my opinion left their starters in too long after obvious signs of fatigue were showing.

In racing the sign of pending collapse in pace of the opponent is change in their breathing pattern. A runner instinctively learns that this is the time to press the pace on the opponent.This will bring the collapse on before they can strategically slow the pace. If their cardio's exhausted they cannot "kick". Both sides were showing signs of cardio exhaustion. For fast twitch, however, there is more than cardio. A fast twitch athlete has 3 or 4 supreme total explosive efforts before their muscles start showing great decline. (Hence why in jumping events in the Olympics strategy calls for passing until the near the optimal height.) . There were several times the Thunder could have made a statement with a explosive dunk, but settled for a gentle lay-up.

Durant played with the legs of a highly conditioned young man, but the strategic timing of an experienced jumper/racer.




I note Henry Winkler and Fred Thompson touting the merits of reverse mortgages.

Without any facts my gut says they are bad?

Any Specs have any facts to share?

Russ Sears writes:

Those considering this should shop around. The commissions are high and the margins are also. This is especially true if they are not in perfect health, as the actuary tables assume anti-selection. A much better option, for those with family that can afford it, is to have a family member monthly buy a higher percentage of the resale value at time of inheritance. 




thanks for sharing with us your 18 years of heartfelt effort. From the twinkle in your eye and the cooing the first time I held you, I could tell you're a fighter with a zest for life. It could be said that your birth was a miracle: twice while still in the womb you picked just the right time and way to alert Dr. Deseay you wanted to live. When things get rough, and you wonder "why", take it from a first time Dad that saw the birth, the twinkle, and the smile over and over; your life is a miracle: Never forget that. You and I never had the big battles so many parents and kids have over their independence; nevertheless, I can tell you yearn to take control over your life. Never feel guilty for wanting this. Nor should you let this responsibility overwhelm you until you cede control just so you don't have to make the tough decisions that will make you who you will become.

Over the next few years there will be plenty of people that will try to replace Mom and Dad. Suitors, bosses, even teachers and preachers will all try to exploit you to make you into something you are not. Some may be trying to enlarge their power, but others are simply passionate and want to mold you into their passions no matter the mismatch. Be true to yourself.

Over the next few years try to discover who that is. Try new things. Take classes, just to explore something. Go places just to meet different people. Take risks. Do not settle just to settle. I know it is tough, sometimes you may not know your major, may not have a job, may not have boyfriend, or may not have a group of friends to hang out with on a weekend and money will be tight. But each of these things is too foundational to pick the wrong ones.

It is scary and disheartening to think you may not be needed or wanted. But never be too afraid of the unknown to quit. When you find yourself without these anchors, then is the times to double down have confidence and invest in you. If it is not working for you, be quick to admit you made a mistake and reverse course.

However, on the other side, once you see both the potential and the real cost and you believe in something or someone and enjoy your work, do not look back. If you decide it is for you, do not trade your responsibility for the thrill of the chase, or to keep dreaming rather than face the harshness of the real world. Neither should you give up because it is too hard or not as easy as you thought.

But most of all trust in yourself when others say you cannot, it is impossible, or that only the lucky "make it" in that world if you really want it and know that you are made for it. The critics maybe right about the luck needed. The critics are always right that effort required would be too monumental if there is no passion. But for the passionate, effort is child's play and sacrifice is a perfect fit for those built for the job.

Perhaps the secret to controlling your universe is believing in others. Call it God or Karma, but "what measure ye mete, it shall be measured to you again". Therefore, look for what others bring to the table, rather than define them by their weaknesses. Look for the good in others.

This is how you find favor with other because this is how they see themselves. They believe what they bring to the table is of the utmost importance. They then can return the favor. Those that do the same for all are those that you should trust, rely on, and bring close. These are the people that will make you prosper and bring you happiness. Recognizing the richness that others bring to your life in return will bring you love. When you look for and believe the good in others only then you can see it and believe it about yourself. Recognizing what you bring to the world, and will then help you find the richness that makes you, "YOU".

Love always,




 My teens say facebook is yesterday–hope the IPO isn't a "fail" as they call things that suck, or do not work. 

Facebook IPO Status Update:

The stock now could go public at a lower price. Moreover, new uncertainty about the Menlo Park, Cal., company's growth prospects may temper some of the feeding frenzy that was expected to take place on the stock's first day of trading — currently scheduled for May 18.

Craig Mee responds:

Agreed. Looking at explosive movers and shakers like Google, Facebook is a different animal. Google gets the job done, but Facebook is more part of a trend or coolness factor that can be side stepped as quick as the share/message/like buttons allow. What's more, the site, especially the log in page, looks kind of old school. You can buy things, but you can't buy coolness, once you've lost it.

Russell Sears writes:

My daughter says it is because Facebook has been taken over by all the whiners, posting all the time and losers playing games. It seems the only acceptable use is keeping Grandma up to date. Hence if you admit you use it, you are the sucker at the table.

Gary Rogan writes:

In addition to the inherent instability of any high tech company, this one adds the delightful dependence of its success on the what most of its customers think of most/some of its other customers, usually a characteristic associated with trendy fashion retailers and night clubs. Compared to this one, Groupon that made another all-time low today at significantly less than half of its initial trading range is the rock of Gibraltar.



 It has always seemed to me that one of the worst and most frequent causes of defeat in basketball is showboating. After being ahead two games ago by 17 points at the end of the third quarter, the Knicks managed to lose to Atlanta. The loss came after a 3 point shot by Novak that the whole bench jumped up to cheer about to Novak's Gallinari like smile of triumph and joy. I say that too many games are lost when one team has a large lead to bear consistent with randomness or lack of serial correlation which some Kahneman like biased researchers playing to the crowd have posited for bastketball. A main cause is showboating but the general problem of letting up is relevant also. "Never let up" is a great motto for market players and basketball players. I tried to insulate myself from this in squash by pretending that the score was reversed against me when I got a good lead in squash. I tried to hold my opponents to straight game losses and under double digits when I played. And to a remarkable extent I was successful at it. I don't ever remember losing a match when I had a big lead, and I remember all my losses. I wish I were as good at not letting up or winning in the markets as I was at squash. I am not one tenth as good. What is the remedy for letting up and showboating in the market? I would say the answer must be quantified. What's the expectation when the market is up by x or more with just y hours to the close. What happens after a inordinate move with a bar? That's a start.

A coach unlike the terrible and ineffective D'Antoni who was such a source of the Knicks losing records, and now that he has been fired is receiving such loving and adulatory treatment by the press, in a syndrome of "don't say bad things about the man who died" was actually encouraging of the showboating. Which coaches are good at rooting out showboating, and good at maintaining leads? What can we learn from them? How could it be applied to markets?

On another front, a reader writes in response to Tim Melvin's great piece about baseball that baseball is dying in the US as the blacks abandoned it for basketball and the kids now abandon it for soccer. He says the baseball diamonds are empty. Is this statement true? Are there any profitable activities based upon that idea? I wonder if it can be generalized to buying stocks that the kids are interested in as opposed to what adults like. My kids are very adept at picking stocks.

T.K Marks adds: 

The showboating tedium would appear to be not limited to basketball, but rather a pervasive plague that cuts across all sports. Golf may be the last refuge of sporting decorum. Same for Wimbledon.

Some years ago NFl coach Marty Schottenheimer referred to this trend as the "SportsCenter mentality." Everybody wants to be an ESPN highlight. As such, the objective in many football circles is no longer to wrap one's arms around the ballcarrier to better ensure making the tackle but rather to lead with the shoulder and try to knock the guy into the next zip code. The problem is they're going after a moving target and shoulders however brawny can't grab. Arms can.

"…In 1998, when the Kansas City Chiefs were penalized 15 times in a game, many for taunting, showboating, late hits and every act of unsportsmanlike conduct, their disgusted head coach, Marty Schottenheimer, explained, "It's the 'SportsCenter' mentality."

A cultural anthropologist might say that the devolution of decorum that we see on playing fields is a reflection of shifting social mores that increasingly accommodate an anything-goes, me-me-me collective mindset. It's the ascendance of flamboyance over fundamentals.

It's not a trend that is limited to sports. A friend's mother is an English professor. She once shared with me an observation she had made of her students: Nobody could spell anymore. Even seemed to be oblivious to the 'i before e' thing. Rather, they all went for shock value in their compositions. The implication being that spelling was insufficiently postmodern in their eyes, I guess.

P.S. I may have to re-visit that golf as a redoubt of manners notion. As I type I'm watching The Masters on tv and Tiger Woods just hit an errant shot. He kicked his club, demonstrably pouted, cussed. The whole fairway intemperance package.

Kurt Specht writes:

Fortunately, Tiger is the rare exception and nearly all involved with professional golf do maintain civil decorum. He has been an arrogant ignoramus for many years.

Jay Pasch adds: 

This is a gold mine for a trader, and for the bullish chartist to invert the chart once in a while in order to see what the other side has in mind…

An anonymous contributor writes in: 

Perhaps the markets equivalent to showboating is market arbitrage, because both have a way of snatching defeat from an apparent victory. Both show disrespect for those on the other side of your performance. Both imply that you are the smartest most talented and your approach is the only side worth considering. The other side is either stupid, without hope of duplicating you or blind to the easy win.

Sometime the common sense of "no free lunch" will help those vulnerable to hubris reject something presented with the actual word "arbitrage". However, if you are vulnerable to hubris of omniscience (including science is complete and has all the answers) or manifest destiny (mystical chosen favor) you still are prone to believe the con man pitching your talent, position and place. You want models or world views that confirm you are right rather than confront where you need improvement. You do not want to look for the true risk reward trade off.

The reason both showboating and "arbitrage" are so dangerous is: it disarms one to the risks, so that you become blind to the risk outside your vantage point. It dismisses the risks that you are the one wrong or the sucker at the table that you are being hustled (see AIG or subprime CDO counterparties to the too big to bring to justice). It makes others hold you in the same contempt you show to the weaker hand… and makes you a target for the bigger fish. It invokes envy. It causes you to seek affirmation rather than constructive criticism, making you prey for those with flowery words. It rejects coaching especially from those "beneath" you. It assumes you have arrived and need not evolve.

Risk is constantly evolving. If there was an underlying attitude that caused the crisis it was that AAA credit was not vulnerable to this evolution. 

Russ Sears writes: 

Vic, one need not worry too much about baseball's future if one visits small towns in Oklahoma and Texas. What the blacks may have abandoned, the hispanics have filled in. There will still be those most hungry for success ready to fill the city kids place.

35 years ago, in 6th grade, I lived in Glencoe, OK, a town so small that I could walk from one side to the other in 5 minutes. I played 3 sports, baseball, basketball and track. The biggest building was the school gym. The stands would be half full for a 6th grade baseball game. The population would more than double when the high school teams played since the county folks and the visiting team's fans also swarmed the stands on a Friday night.

I went back to visit a couple years ago. The dirt track was now trailer classrooms. The whole town had turned into a trailer park,  perhaps tripling the population from 1970s. Glencoe is now the "new" poor, those outside the mainstream media view but growing, looking and waiting for their chance. The town is run down, the houses from the 70s all are run down and trailers surround them, even on the smallest lots. Besides the trailers, the school building are all from the 70s.

However, the baseball diamond is much bigger and better than before. The stands and concession building are much bigger also. I imagine them full on a Friday night in May.

I would suggest that in addition to trusting the stock picks of your kids, you ask farmers and others who travel all over the country their local picks. Ask those where the money is flowing what they see.



 When I first started studying stocks and insider trading, I got a cold call from a broker touting a medical stock saying insiders were buying. A little research showed that all the executives got company large loans to buy stock, and the company was in trouble, right before they faced bankruptcy.

Then Indiana's biggest insurance company at the time through rapid acquisition, Conseco, CEO and Board, also seemed to buy just before any big announcement. But again, they got big loans to buy stock right when they got in trouble buying the mobile home lenders. I believe it was Greentree Financials, the first "big" financial failure due subprime 10 years before the crisis of the "big" financials, who were smarter than everybody else.

After these 2 experiences, one wonders, if this is a "hail mary" signal. When the board wants insiders to buy a synthetic call (buying the stock, in effect shorting their bonds by taking a loan), do the stock and their bonds underperform?

Any studies on this?

Henrik Andersson writes: 

The firm I work for just launched a product following insider transactions and the track record per insider for Sweden. The product was first back tested. Part of the conclusion for that back test were:

After studying over 140,000 insider transactions over the past 12 years in Sweden, we conclude that following insiders leads to excess returns on average, confirming the results of numerous academic studies. However, not all insiders were created equally: some company insiders have a much higher "hit ratio". Our analysis also confirms the limited value of sell transactions for generating excess returns on an individual stock basis, although the volume of insider selling on aggregate can be a useful alarm bell for market moves. Our analysis of Swedish insider transactions shows that insiders have on average earned an excess return on share purchases of 3.2%, 5.5% and 13.3% for 3, 6 and 12-month holding periods respectively. Insider purchases outperform the market 55% of the time, but there are large deviations in this "hit ratio" by company.

The log normal distribution of the returns of the insiders look normal but with the average return beating the market.



Keep it simple.
The Ideal seldom,
Presents itself,
All at once.

Sushil Kedia writes: 

My 2 cents:

1. A reward can only come from change.
2. Change, though is the only constant, its expectations are never across people or time.
3. Hence, uncertainty of change only allows for trade to occur. If all are certain ever of the amount and time required for change, prices will only jump and no trade will happen and hence no profits possible.
4. Risk thus is a twin-sister of rewards.
5. No Risk = No Reward.

keep looking »


Resources & Links